UNITED STATES

FORM 10-Q

For the quarterly period ended June 30, 2004
or

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

ROHM AND HAAS COMPANY

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 July 30, 2004: 224,345,850 shares

ROHM AND HAAS COMPANY & 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

Rohm and Haas Company and Subsidiaries
Consolidated Statements of Cash Flows

See Notes to Consolidated Financial Statements

Rohm and Haas Company and Subsidiaries
Consolidated Balance Sheets

See Notes to Consolidated Financial Statements

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 8, 2004, for the year ended December 31, 2003.

During the second quarter of 2004, we identified several prior period entries pertaining to the accounting for the acquisition of Morton International that were incorrectly classified on our balance sheet. We corrected the classification of these entries during the second quarter of 2004 and reclassified prior period balances for all periods presented. The net impact of this reclassification was a $60 million increase to goodwill. We concluded that these reclassifications had an immaterial effect on both the current year and prior year financial statements, including the annual goodwill impairment review required by SFAS No. 142, “Goodwill and Other Intangible Assets.”

NOTE 2: New Accounting Pronouncements

Ø		Variable Interest Entities
		In January 2003, the FASB issued FASB Interpretation No. (FIN) 46, “Consolidation of Variable Interest Entities,” an interpretation of Accounting Research Bulletin (ARB) No. 51, “Consolidated Financial Statements.” FIN 46 requires the assets, liabilities, and results of operations of a variable interest entity (VIE) to be consolidated in the financial statements of the enterprise considered to be the primary beneficiary. The adoption of FIN 46 did not have a material impact on our financial statements.
		We hold an interest in a joint venture, accounted for under the equity method of accounting, that is considered a VIE. The variable interest relates to a cost-plus arrangement between the joint venture and each joint venture partner. We have determined that Rohm and Haas is 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 the company and the other joint venture partner, and has been in existence since 1999. As of June 30, 2004, our investment in the joint venture totals approximately $29 million, representing our maximum exposure to loss.

NOTE 3: Segment Information

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

Ø		Coatings
		This segment is comprised of three businesses: Architectural and Functional Coatings, Powder Coatings, and Automotive Coatings. Architectural and Functional Coatings produces acrylic emulsions and additives that are used to make industrial and decorative coatings, varnishes and specialty finishes. This segment also offers products that serve a wide variety of coatings to: industrial markets for use on metal, wood and in traffic paint; the building industry for use in roofing materials, insulation and cement markets; and consumer markets for use in paper, textiles and non-woven fibers, graphic arts and leather markets. Powder Coatings produces a comprehensive line of powder coatings that are sprayed onto consumer and industrial products and parts in a solid form. Our powder coatings are used on a wide variety of products, ranging from door handles to patio and

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		deck furniture, to windshield wipers, televisions and industrial shelving. Automotive Coatings formulates and manufactures decorative and functional coatings for plastic automotive parts such as bumper covers and interior and exterior trim of cars and trucks.
Ø		Performance Chemicals
		This segment includes the sales and operating results of Plastics Additives, Process Chemicals, Consumer and Industrial Specialties and other smaller businesses. 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.
Ø		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 super absorbent polymers and acrylic sheet.
Ø		Electronic Materials
		This segment is comprised of three businesses: Circuit Board Technologies, Packaging and Finishing Technologies, and Semiconductor Technologies. Electronic Materials provides cutting-edge technology for use in telecommunications, consumer electronics and household appliances. The Circuit Board Technologies business develops and delivers the technology, materials and fabrication services for increasingly powerful, high-density printed wiring boards in computers, cell phones, automobiles and many other electronic devices today. Our Packaging and Finishing Technologies business develops and delivers innovative materials and processes that boost the performance of a diverse range of electronic, optoelectronic and industrial packaging and finishing applications. Semiconductor Technologies 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 a smaller and faster chips. This business also develops and delivers materials used for chemical mechanical polishing (CMP), the process used to create the flawless surfaces required to make faster and more powerful integrated circuits and electronic substrates.
Ø		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, ice control, food processing, and industrial and agricultural applications.
Ø		Adhesives and Sealants
		The Adhesives and Sealants segment provides an array of formulated, value-adding products derived from a broad range of technologies including our world-class acrylic technology. This segment offers various products including packaging adhesives, pressure sensitive and construction adhesives and transportation adhesives based on numerous chemistries and technologies.

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

Net Sales by Business Segment and Region

Net Earnings (Loss) by Business Segment (1, 3)

(1)		Presented before cumulative effect of accounting change.
(2)		Corporate includes certain corporate governance costs, the unallocated portion of shared services, interest income and expense, environmental remediation expense, insurance recoveries and certain balance sheet currency translation gains and losses.
(3)		Net Earnings were tax effected using our overall consolidated effective tax rate.

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NOTE 4: Restructuring and Asset Impairments

The following net restructuring and asset impairment charges were recorded for the three and six months ended June 30, 2004 and 2003, respectively, as detailed below:

Provision for Restructuring and Asset Impairment by Business Segment

2004

Severance and Employee Benefits

During 2004, we recorded a charge of $11 million for severance and employee separation benefits, affecting 220 positions. This charge is primarily associated with the reorganization of our Louisville plant in our Plastic Additives business, but also included several smaller reductions in force efforts in other businesses. Offsetting this charge was $11 million of changes in estimates to reserves recorded for prior year initiatives. This change in estimate is largely related to a reduction in the design and scope of our previously announced North American support services restructuring, as certain business model transformation opportunities did not generate the anticipated process improvements.

Asset Impairment

We recorded a net gain of $3 million from the sale of a property related to facilities previously impaired.

2004 Restructuring Initiatives

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2003

Severance and Employee Benefits

In 2003, we recognized $96 million of severance and associated employee benefit expense, of which $82 million, affecting 1,460 positions in total, was relative to 2003 initiatives. The 2003 initiatives included: $22 million pertaining to a European restructuring initiative; $25 million associated with the elimination of positions primarily in our North American support services, such as logistics, human resources, procurement and information technology; and $35 million associated with several smaller reduction in force efforts in all of our businesses. In most cases, separated employees were offered early termination benefits. The charge was based on actual amounts paid to employees as well as amounts expected to be paid upon termination. Included in the $96 million charge is $14 million of expense, comprised of a $2 million reversal of charges recorded in 2003 for 2003 initiatives and $16 million of expense pertaining to prior period initiatives.

As of June 30, 2004, 722 positions of the 1,460 initially identified have been eliminated. In 2004, we reduced the total number of positions to be affected by these initiatives by 250 positions. This reduction is primarily a result of the change in scope of the North American support services restructuring. All initiatives will be materially complete within 18 months from the date of implementation.

The balance at June 30, 2004, recorded for severance and employee benefits, was included in accrued liabilities in the Consolidated Balance Sheet. A summary of the 2003 initiatives is presented below:

2003 Restructuring Initiatives

Asset Impairments

In 2003, we recognized $96 million of net asset impairment charges. Of the total, $116 million was recognized as asset impairment charges recorded to adjust the carrying value of certain assets to their fair value, which was calculated using cash flow analyses. Gains on sales of previously impaired assets offset the total impairment charge by $20 million.

NOTE 5: Stock-Based Compensation

We have various stock-based compensation plans for directors, executives and employees. The majority of our stock-based compensation is made in restricted stock, restricted stock units and non-qualified stock options. Effective January 1, 2003, we prospectively adopted the fair value method of recording stock-based compensation as defined in SFAS No. 123, “Accounting for Stock-based Compensation.” As a result, in 2003 we began to expense the fair value of stock options that were awarded to employees after January 1, 2003. Prior to 2003, we accounted for stock options using the intrinsic method in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees.” Under this method, no compensation expense was recognized for stock options awarded prior to 2003.

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. Since we chose the prospective method of expensing stock options, the actual stock-based compensation expense recorded in 2003 and the first half of 2004 was less than the amount calculated for this pro forma requirement.

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NOTE 6: Earnings (loss) Per Share

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

(a)

For the three months ended June 30, 2004 and 2003, 11.7 million shares and 12.4 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 six months ended June 30, 2004 and 2003, 11.6 million shares and 9.0 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.

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NOTE 7: Derivative Instruments and Hedging Activities

We use derivative and non-derivative financial instruments, under established policies, to manage market risk arising out of changing foreign exchange rates, interest rates and commodity prices, which have a material impact on our earnings, cash flows and fair values of assets and liabilities. We do not use derivative instruments for trading or speculative purposes. Our policies prohibit us from entering into leveraged derivative instruments and instruments that cannot be valued by independent third parties. We manage counter-party risk by diversifying trading among major financial institutions with investment grade credit ratings and by limiting our dependence upon each institution consistent with our assessment of credit quality. Additional information can be found in our Annual Report filed on Form 10-K with the SEC.

Ø		Currency Hedges
		We enter into foreign exchange option and forward contracts in order to reduce the risk associated with variability in our operating results from foreign-currency-denominated cash flows. These contracts are designated as foreign currency cash flow hedges covering portions of our twelve-month forecasted cash flows. These contracts mature when the underlying cash flows being hedged are forecasted to be realized. Because the option and forward contracts are considered highly effective hedges, the cash value less cost will be reflected in earnings at maturity. All contracts are marked-to-market at each balance sheet date with changes in fair value prior to maturity recorded in accumulated other comprehensive income (loss).
		During the past three years we have hedged our foreign-currency-denominated cash flows primarily by purchasing twelve-month options to sell underlying currencies at the spot rate in effect at the time of purchase. This approach to hedging establishes floors for the dollar value of future cash flows while allowing full appreciation as the dollar weakens. During much of this period the U.S. dollar, and the value of these option contracts, decreased in value while the underlying cash flows appreciated in dollars terms. Consequently, losses representing the decrease in value of outstanding options have accumulated in other comprehensive income. For the three months ended June 30, 2004, these contracts increased in value reducing the after-tax loss recorded in accumulated other comprehensive income (loss) from $3 million to $2 million. For the three months ended June 30, 2003, these contracts decreased in value increasing the after-tax loss recorded in accumulated other comprehensive income (loss) from $4 million to $5 million.
		When options mature, the premiums paid are reclassified against earnings from accumulated other comprehensive income. For both the three months ended June 30, 2004 and 2003, $2 million in after tax losses were recorded against earnings related to foreign currency cash flow hedging contracts which matured during the respective periods. These losses represented the difference between the premium paid and the value of the options. For the six months ended June 30, 2004, these contracts increased in value reducing the after-tax loss recorded in accumulated other comprehensive income (loss) from $5 million to $2 million. For the six months ended June 30, 2003, these contracts decreased in value increasing the after-tax loss recorded in accumulated other comprehensive income (loss) from $4 million to $5 million. For the six months ended June 30, 2004 and 2003, a $2 million after tax loss and $3 million after-tax loss, respectively, were recorded against earnings related to foreign currency cash flow hedging contracts which matured during the respective periods. These losses represented the difference between the premium paid and the value of the options.
		Changing market conditions will impact the actual amounts recorded to earnings during the following twelve-month periods. Both the effective and ineffective portions of cash flow hedges recorded in the Consolidated Statements of Operations are classified in other income, net.

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Period changes, net of income tax, within accumulated other comprehensive income (loss), due to the use of foreign currency cash flow hedges, are reconciled as follows:

Currency Cash Flow Hedges

		We contract with counter-parties to buy and sell foreign currency to offset the impact of exchange rate changes on 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. All contracts are marked-to-market at each balance sheet date with changes in fair value recorded in other income, net. For the three months ended June 30, 2004 and 2003, a $1 million and $2 million after-tax gain, respectively, were recorded in earnings for foreign currency fair value hedges. For the six months ended June 30, 2004, an after-tax gain of $1 million was recorded in earnings for foreign currency fair value hedges.
		We utilize foreign exchange forward and currency collar contracts together with non-dollar borrowings to hedge the foreign currency exposures of our net investments in foreign operating units in Europe and Japan. These derivative instruments and non-dollar borrowings are designated as hedges of net investments. Accordingly, the effective portions of foreign exchange gains or losses on these hedges are recorded as part of the cumulative translation adjustment, which is part of accumulated other comprehensive income (loss). At June 30, 2004 and 2003, $109 million and $87 million in after-tax losses, respectively, were recorded in cumulative translation adjustment representing the effective portions of foreign exchange losses on these hedges. Of those amounts, $46 million and $47 million in after-tax losses at June 30, 2004 and 2003, were related to short-term euro and long-term Japanese yen borrowings and the remainder was related to exchange forward and currency collar contracts in these currencies.

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Total derivative and non-functional currency liabilities designated as hedges of net investments outstanding at June 30, 2004 were $373 million compared to $895 million outstanding at June 30, 2003. The following table sets forth the derivative and non-derivative positions designated as hedges of net investments outstanding at June 30, 2004 and 2003:

Included in other comprehensive income as cumulative translation adjustment for the three months ended June 30, 2004 and 2003, were losses of $5 million and gains of $29 million, respectively, net of respective hedge gains and losses. Included in other comprehensive income as cumulative translation adjustment for the six months ended June 30, 2004 and 2003, were losses of $13 million and gains of $35 million, respectively, net of respective hedge gains and losses. The reconciliation within cumulative translation adjustment is provided as follows:

Gains/(Losses)

		The amounts that are considered ineffective on these net investment hedges were recorded in interest expense. The impact on interest expense was immaterial for both the three and six months ended June 30, 2004 and 2003.
Ø		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 June 30, 2004 and 2003, is a $2 million and $1 million after-tax gain, respectively, which represents the accumulated market value changes in those outstanding commodity swap, option and collar contracts. These contracts are considered highly effective as hedges and will mature consistent with our purchases of the underlying commodities during the following twenty-four month period. The actual amounts to be charged to earnings will depend upon spot market prices when these contracts mature. For those commodity contracts that matured during the three months ended June 30, 2004 and 2003, a $ 1 million gain was recorded for each period in cost of goods sold with the related tax effect recorded in tax expense. For the six months ended June 30, 2004 and 2003, a $1 million loss and $4 million gain, respectively, were recorded as components of costs of goods sold with the related tax effect recorded in tax expense with respect to those commodity swap, option and collar contracts maturing during the same periods.

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Period changes, net of income tax, within accumulated other comprehensive income (loss), due to the use of commodity cash flow hedges, are reconciled as follows:

Commodity Cash Flow Hedges

Ø		Interest Rate Hedges
		We use interest rate swap agreements to maintain a desired level of floating rate debt. In 2001, we entered into interest rate swap agreements with a notional value of $950 million, which converted the fixed rate components of $451 million notes due July 15, 2004 and the $500 million notes due July 15, 2009 to a floating rate based on three-month LIBOR. During December 2003, we redeemed the $451 million notes early, and terminated the related interest rate swap agreements with a $450 million notional value. During May 2004, we terminated the $500 million notional value interest rate swap agreements and received $43 million. These proceeds will be amortized as a reduction to interest expense over the remaining life of the $500 million notes. During October 2003 and May 2004, we entered into interest rate swap agreements with a notional value totaling €400 million, which convert the fixed rate components of €400 million notes due March 9, 2007 to a floating rate based on six-month EURIBOR.
		The interest rate swap agreements are designated and accounted for as fair value hedges. The changes in fair value of interest rate swap agreements are marked-to-market through income together with the offsetting changes in fair value of the underlying notes using the short cut method of measuring effectiveness. As a result, the carrying amount of these notes was increased by an immaterial amount at June 30, 2004 and $55 million at December 31, 2003, while the fair value of the swap agreements was reported as other assets in the same amount. The swap agreements reduced interest expense by $4 million and $10 million for the three months ended June 30, 2004 and 2003, respectively, and $11 million and $20 million for the six months ended June 30, 2004 and 2003, respectively.
		The €400 million interest rate swap agreements maturing in 2007 contain credit clauses where each counter-party has a right to settle at market price if the other party is downgraded below investment grade.

As of June 30, 2004 and 2003, we maintained hedge positions of immaterial amounts that were effective as hedges from an economic perspective but did not qualify for hedge accounting under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. Such hedges consisted primarily of emerging market foreign currency option and forward contracts, and have been marked-to-market through income, with an immaterial impact on earnings.

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NOTE 8: Comprehensive Income (Loss)

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

NOTE 9: Pensions and Other Post-retirement Benefits

We sponsor and contribute to pension plans that provide defined benefits to domestic and non-U.S. employees. Pension benefits earned are generally based on years of service and compensation during active employment. The following disclosures include amounts for both the U.S. and significant foreign pension plans and other post-retirement benefits.

Estimated Components of Net Periodic Cost

Employer Contributions

We previously disclosed in our Annual Report filed on Form 10-K for the year ended December 31, 2003, that we expected to contribute $15 million to our smaller international plans in 2004. As of June 30, 2004, approximately $8 million of contributions have been made.

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NOTE 10: Restricted Cash

At June 30, 2004, we classified $47 million as restricted cash. These funds were invested in cash equivalents for one year, through a trust designed to financially assure state governments that we will meet environmental responsibilities with respect to plant operations. Such guarantees were previously satisfied through bank letters of credit.

NOTE 11: Inventories

Inventories consist of the following:

NOTE 12: Goodwill

Annual 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 annual impairment review of goodwill and indefinite-lived intangible assets. Our annual impairment review is as of May 31. During the second quarter of 2004, we completed our 2004 review and determined that goodwill and indefinite-lived intangible assets were fully recoverable as of this date. For purpose of this review, we primarily utilized discounted cash flow analysis for estimating the fair value of the reporting units.

Goodwill

The changes in the carrying amount of goodwill for the six months ended June 30, 2004, by business segment, are as follows:

(1)		Certain prior year balances have been reclassified to conform with the current year presentation
(2)		Goodwill related to acquisitions is due to the following: Monomers – contingent purchase price from a European Monomer acquisition; Electronic Materials – Rodel acquisition.
(3)		Certain goodwill amounts are denominated in foreign currencies and are translated using the appropriate U.S. dollar exchange rate.
(4)		Amounts represent adjustments to opening balance sheet assets and liabilities due primarily to settlement of certain tax related matters

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NOTE 13: Other 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.

Indefinite-lived Intangible Assets

In connection with the adoption of SFAS No. 142, effective January 1, 2002, we identified certain intangible assets with indefinite lives pertaining to our Salt segment.

Finite-lived Intangible Assets

Finite-lived intangible assets are long-lived intangible assets, other than investments, goodwill and indefinite-lived intangible assets. They are amortized over their estimated useful lives and are reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

The following table provides information regarding our intangible assets:

(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.
(2)		Certain of our intangible assets are denominated in foreign currencies and are translated using the appropriate U.S. dollar exchange rate. During the six months ended June 30, 2004, the currency translation adjustment was $3 million and is included in the gross carrying amount.

Amortization expense for finite-lived intangible assets was $15 million and $17 million for the three months ended June 30, 2004 and 2003, respectively, and $31 million and $34 million for the six months ended June 30, 2004 and 2003, respectively. Estimated future amortization expense during the next five years is $60 million in 2005, $59 million in 2006, $59 million in 2007, $59 million in 2008 and $58 million in 2009.

NOTE 14: Contingent Liabilities, Guarantees and Commitments

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.

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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.

Ø		Wood-Ridge Site
		In Wood-Ridge, New Jersey, Morton International (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) acquired by a Morton predecessor. 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. In our allocation of the purchase price of Morton, we accrued for additional study costs and additional remediation costs based on the ongoing studies.
		Our exposure at the Site will depend in part on the results of attempts to obtain contributions from others believed to share responsibility. 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. Although Morton has contractual rights against Velsicol for payment of a share of remedial costs that are not affected by the government settlement, we believe Velsicol’s ability to pay is limited.
		In addition, we paid $225,000 for the EPA to develop a work plan for a separate study of contamination in Berry’s Creek, which runs near the Site, and of the surrounding wetlands. In 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. Today, 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.
Ø		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 accruals established for this matter were sufficient to cover the costs of the settlement. As a part of this agreement, 23 chemical facilities were subject to environmental audit by an independent consultant. Findings were provided to the government, but penalties,

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associated with the findings have not yet been negotiated. In December 2001, we closed the chemicals portion of the Moss Point facility and are in the process of closing the remaining 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, a former Morton employee, and the Mississippi Department of Environmental Quality alleging personal injury and property damage caused by environmental contamination. Since then, similar complaints were filed in Mississippi on behalf of additional plaintiffs and the number of plaintiffs now total approximately 2,500. These are individual plaintiffs since Mississippi procedural rules do not permit class actions. We do not believe these claims have merit and we will defend against them vigorously.

Ø		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 operation. Removal of most of the contaminated soil is complete and further soil remediation measures are under design. We are in negotiations with the United States Department of Justice to resolve claims under the Clean Air Act relating to a 1998 explosion at this location.
Ø		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.
Ø		Company Manufacturing Facilities
		We also have accruals for corrective action programs under governmental environmental laws at several of our manufacturing sites. The more significant of these accruals have been recorded at the following sites: Bristol, Pennsylvania; Houston, Texas; Ringwood, Illinois; and Mozzanica, Italy. We are in discussions with the EPA regarding possible enforcement arising out of an environmental inspection in 2000 at our Houston facility.
Ø		Remediation Reserves and Reasonably Possible Amounts
		Our reserves for environmental remediation, as presented below, are recorded appropriately as current and long-term liabilities in the Consolidated Balance Sheets. The amounts charged to earnings pre-tax for environmental remediation and related charges were $8 million and $4 million for the three months ended June 30, 2004 and 2003, respectively, and $19 million and $7 million for the six months ended June 30, 2004 and 2003, respectively. The reserves for remediation were $139 million and $127 million at June 30, 2004 and December 31, 2003, respectively, and are recorded as liabilities (current and long-term) in the Consolidated Balance Sheets.
		Our reserves represent those costs that we believe to be probable and reasonably estimable. Other costs, which have not met the definition of probable, but are reasonably possible and estimable, have been included in our disclosure of reasonably possible loss contingencies. In addition to accrued environmental liabilities, we have identified reasonably possible loss contingencies related to environmental matters of approximately $87 million and $84 million at June 30, 2004 and December 31, 2003, respectively.
		Further, we have identified other sites, including our larger manufacturing facilities, where additional 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 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.

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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 subsequently received a request for additional information from the Japanese Fair Trade Commission. The Japanese Fair Trade Commission found that three Japanese producers had fixed prices for plastics additives products but found no illegal conduct by Rohm and Haas. We are cooperating fully with all governmental authorities.

In addition, the company is a party to seven private civil antitrust actions which have been consolidated in the U.S. District Court for the Eastern District of Pennsylvania 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 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. In May 2004, another lawsuit was filed in state court in California seeking to recover damages on behalf of California’s indirect purchasers of plastic additives products. 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. In the past, many companies with manufacturing facilities had asbestos on their premises. As a result of the bankruptcy of asbestos producers, plaintiffs’ attorneys are increasing their focus on peripheral defendants, including the 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. As the asbestos producers are bankrupted, the demands against companies with older manufacturing facilities of any type in the United States, such as the company, are increasing. We have reserved amounts for premises asbestos cases that we currently believe are probable and estimable; we cannot reasonably estimate what our asbestos costs will be if the current situation deteriorates and there is no tort reform.

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

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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, 2003, and Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) included in our 2003 Annual Report filed on Form 10-K with the Securities and Exchange Commission (SEC).

Within the following discussion, unless otherwise stated, “three month period” and “six month period” refers to the three and six months ended June 30, 2004, and “prior period” refers to comparisons with the corresponding period in the previous year, unless otherwise stated.

Net Earnings before cumulative effect of accounting change are abbreviated as “Earnings” within the MD&A.

Company Overview

We are a global specialty materials company that began over 90 years ago when a chemist and a businessman 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 $6.4 billion in 2003 on a portfolio of global businesses including specialty chemicals, electronic materials and salt. Today, we leverage science and technology in many different areas to design materials and processes that enable our customers’ products to work. We serve many different market places, the largest of which include: construction and building, electronics, packaging, household products and personal care, automotive, and food and retail. To serve these markets, we operate approximately 100 manufacturing and 30 research facilities in 27 countries with approximately 17,000 employees. Our geographic reach continues to expand with approximately 52% of our sales in North America, 27% in Europe, 18% in Asia-Pacific and 3% in Latin America.

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 will be in the Asia-Pacific region over the next ten years.

The specialty materials industry is highly competitive. In some sectors, global dynamics have put specialty materials producers in 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 super-efficient commercial transactions enabled by the internet are testing the historical industry models. We believe opportunities exist for companies with the right business portfolio of value-added products and the global presence and flexibility to cope with these changing macro-industry trends.

Our Focus

Our focus is on the following areas:

	•		Growth
	•		Cash Generation
	•		Corporate Governance

Growth

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

	•		Innovation — focusing our research investment on development of new products, new technology and step-out opportunities, particularly in the areas of our world class acrylic and electronic material technologies;
	•		Marketing excellence — focusing our energies on the fastest growing market segments; cultivating our name recognition in the marketplace and differentiating ourselves from our competitors;
	•		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

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Growth through efficiency — leveraging our state-of-the art information technology infrastructure, including our recently implemented Enterprise Resource Planning system, as well as standardizing and simplifying work processes and realigning our global manufacturing footprint.

Cash Generation

We will use our ability to generate cash flow from operating activities and our strong cash position to maintain flexibility in our balance sheet, while continuing the company’s long history of increasing dividend payments. In both 2003 and 2002, we generated over $900 million in cash from operating activities.

Corporate Governance

Our company was built and continues to rely on a strong foundation of core values. We believe that 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 salaried 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. We have identified the following as our core values: