WILMINGTON, DE, October 23, 2006 . . . Hercules Incorporated (NYSE: HPC) today reported net income for the quarter ended September 30, 2006 of $34.2 million, or $0.31 per diluted share, as compared to net income of $24.0 million, or $0.22 per diluted share, for the third quarter of 2005.⁽¹⁾ A net loss of $3.4 million was reported for the nine months ended September 30, 2006 as compared to net income of $38.1 million for the same period in 2005.

Net income from ongoing operations⁽²⁾ for the third quarter of 2006 was $40.9 million, or $0.36 per diluted share, an increase of 64% per diluted share as compared to net income from ongoing operations of $24.6 million, or $0.22 per diluted share, in the third quarter of 2005. Net income from ongoing operations for the nine months ended September 30, 2006 was $102.5 million, or $0.92 per diluted share, an increase of 35% per diluted share versus the same period in 2005. Please refer to Table 2 and Table 3 for a reconciliation of net income from ongoing operations to reported net income.

Cash flow from operations for the nine months ended September 30, 2006 was $107.0 million, an increase of $31.2 million as compared to the same period last year.

Net sales in the third quarter of 2006 were $513.1 million, a decrease of 1% from the same period last year. Excluding the impact of the sale of our majority interest in FiberVisions (the "FiberVisions transaction"), sales increased 14% from the same period of last year. Volume and pricing increased by 15% and 2%, respectively. Rates of exchange also increased sales by 2%, while product mix was 5% unfavorable during the quarter. Net sales for the nine months ended September 30, 2006 were $1.541 billion, an increase of 10% as compared to the same period in 2005, excluding the impact of the FiberVisions transaction.

"Our people continue to deliver excellent results with strong growth in sales, earnings and cash flow," commented Craig A. Rogerson, President and Chief Executive Officer. "We continue to drive results through innovation, geographic expansion, a disciplined approach to capital and investment deployment and a focus on cash generation."

Excluding the impact of the FiberVisions transaction, net sales in the third quarter of 2006 increased in all regions of the world. Sales increased 21% in North America, 10% in Europe, 5% in Latin America and 6% in Asia Pacific as compared to the same period last year.

Reported profit from operations in the third quarter of 2006 was $72.4 million, an increase of 45% compared with $50.0 million for the same period in 2005. Profit from ongoing operations in the third quarter of 2006 was $76.4 million, an increase of 25% compared with $61.0 million in the third quarter of 2005. Severance, restructuring and other exit costs were $4.1 million in the third quarter of 2006 as compared to $9.6 million in the same period last year.

Interest and debt expense was $16.7 million in the third quarter of 2006, down $5.8 million, or 26%, compared with the third quarter of 2005, reflecting lower outstanding debt balances and improved debt mix, partially offset by increased variable short term rates. Interest expense for the nine months ended September 30, 2006 was $54.1 million, a decrease of $13.4 million, or 20%, from the same period of last year.

Net debt, total debt less cash and cash equivalents, was $882.7 million at September 30, 2006, a decrease of $149.0 million from year-end 2005.

Capital spending was $26.3 million in the third quarter and $49.2 million year to date. This compares to $19.8 million and $45.7 million in the third quarter and year to date periods last year, respectively. Cash outflows for severance, restructuring and other exit costs were $7.4 million in the quarter and $20.8 million year to date.

Segment Results – Reported Basis

In the Aqualon Group, net sales increased 25% while profit from operations increased 44% in the third quarter as compared with the third quarter of 2005.

All Aqualon businesses had increased sales in the third quarter as compared to the prior year. In the aggregate, the sales increase was driven by 34% higher volume (20% excluding the first quarter acquisition of a guar and guar derivatives business and the consolidation of Hercules Tianpu, the Company's methylcellulose joint venture in China), partially offset by 12% unfavorable product mix (6% unfavorable excluding the acquisition and Tianpu), increased pricing of 1% and 2% favorable rates of exchange. Overall the guar acquisition and Tianpu consolidation accounted for an 8% sales increase.

"Aqualon's volume remains strong across their portfolio," noted Mr. Rogerson. “Our market-focused efforts should continue to drive growth going forward and we expect pricing to show steady improvement.”

Coatings & Construction sales increased 15% in the third quarter of 2006 as compared to the same period of last year, primarily due to 16% higher volume (9% excluding the Tianpu consolidation) and 2% favorable rates of exchange, partially offset by 1% unfavorable product mix (2% favorable excluding Tianpu), and 2% lower pricing. Hercules Tianpu accounted for a 4% sales increase. Sales were strong in most regions, recovering from the soft conditions noted last year in the European markets. Sales of Coatings' products in the Middle East and Asia were especially strong during the third quarter. Sales of construction products were strong in Eastern Europe and other emerging markets. Pricing in the segment improved slightly compared to second quarter, but was still lower compared with the third quarter 2005 reflecting, in part, continued pricing challenges in methylcellulose for construction products.

Regulated Industries sales increased 7% in the third quarter of 2006 as compared to the same period of last year, primarily due to 5% increased volume, 1% increased price and 1% from favorable rates of exchange. Volume increased in many of the end markets and regions. China was especially strong in the food markets. The improved mix reflects more sales in the higher priced pharmaceutical markets.

Energy & Specialties sales increased 57% in the third quarter of 2006 as compared to the same period of last year. The increase was due to 50% higher volume/mix (27% excluding the guar and guar derivatives acquisition), 6% higher price, and 1% favorable rates of exchange. The guar acquisition accounted for a 23% sales increase. The natural gas and oil services sector demand continues to be strong and price increases were achieved in oilfield and across many of the specialty products families.

Aqualon Group's profit from operations increased $16.0 million, or 44%, primarily as a result of the higher volume and the associated contribution margin, partially offset by higher raw material, transportation and utility costs. Selling, general and administrative (SG&A) costs were higher compared to the prior year, primarily reflecting increased corporate support costs, sales and marketing, business management, and technology costs incurred to support growth initiatives.

In the Paper Technologies and Ventures Group ("PTV"), net sales in the third quarter increased 7% and profit from operations increased 20% compared with the same quarter in 2005.

Paper Technologies sales increased 5% due to 3% increased volume, 4% increased price and 2% favorable rates of exchange, partially offset by an unfavorable mix of 4%. Volume growth was achieved in the Americas and in Asia, whereas Europe was lower. Asia volumes remained strong, increasing 15% compared to the prior year. Increased pricing was achieved in all regions of the world. Price increases of $9.8 million exceeded raw material cost increases of $8.8 million. The unfavorable mix primarily reflects higher sales of lower priced functional products in the emerging Asian markets.

Venture sales increased 11% primarily due to 3% higher price, 8% improved product mix, and 2% favorable rates of exchange, partially offset by 2% lower volume. Pricing reflects increases in water management, lubricants and pulping products. The improved mix reflects higher sales of lubricants and adhesive products.

PTV’s increased profit from operations reflects higher volume, improved selling price, and lower SG&A costs, partially offset by higher raw material, transportation and utility costs. Severance, restructuring and other exit costs in the third quarter of 2006 were $1.5 million as compared to $1.6 million in the same period of 2005. SG&A costs were lower than the prior year primarily due to restructuring activities throughout last year. Also, legal fees associated with patent defense costs were significantly lower than the prior year. Partially offsetting these decreases were higher corporate support costs.

"Improved performance in the Americas helped offset the continued challenging conditions in the Western European paper market. And our strategy of improving product mix through innovation and of increasing selling prices to reflect value continues to show progress," commented Mr. Rogerson.

Outlook

"We remain confident in our growth strategy and optimistic about both earnings and cash flow growth for the balance of the year and as we look to 2007," said Mr. Rogerson. "Aqualon's volumes should continue to be strong across its markets and pricing should show steady improvement. Paper Technologies' volumes are expected to improve, driven by our new product pipeline, and continued pricing discipline should maintain gross margins."

Third Quarter Conference Call and Webcast

The Company will discuss third quarter 2006 results tomorrow, October 24th, at 8:00 a.m., Eastern.

Teleconference: (973) 582-2854 – Ask for Conference ID # 7917551
Please call 10 to 15 minutes prior to the call.

Webcast: Listen-only mode via Internet broadcast from www.herc.com
under Shareholder Info.

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Hercules manufactures and markets chemical specialties globally for making a variety of products for home, office and industrial markets. For more information, visit the Hercules website at www.herc.com.

This news release includes forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, reflecting management's current analysis and expectations, based on what management believes to be reasonable assumptions. Forward-looking statements may involve known and unknown risks, uncertainties and other factors, which may cause the actual results to differ materially from those projected, stated or implied, depending on such factors as: ability to generate cash, changes resulting from ongoing reviews of tax liabilities, ability to raise capital, ability to refinance, ability to execute productivity improvements and reduce costs, ability to execute and integrate acquisitions, ability to execute divestitures, ability to increase prices, business climate, business performance, changes in tax laws or regulations and related liabilities, changes in tax rates, economic and competitive uncertainties, higher manufacturing costs, reduced level of customer orders, changes in strategies, risks in developing new products and technologies, risks in developing new market opportunities, environmental and safety regulations and clean-up costs, foreign exchange rates, asset dispositions, the impact of changes in the value of pension fund assets and liabilities, changes in generally accepted accounting principles, adverse legal and regulatory developments, including increases in the number or financial exposures of claims, lawsuits, settlements or judgments, the financial capacity of settling insurers, the impact of increased accruals and reserves for such exposures, the outcome of litigation and appeals, including the inability to obtain judicial review of adverse litigation results, and adverse changes in economic and political climates around the world, including terrorist activities, international hostilities and potential natural disasters. Accordingly, there can be no assurance that the Company will meet future results, performance or achievements expressed or implied by such forward-looking statements. As appropriate, additional factors are contained in other reports filed by the Company with the Securities and Exchange Commission. This paragraph is included to provide safe harbor for forward-looking statements, which are not generally required to be publicly revised as circumstances change, and which the Company does not intend to update.
 

HERCULES INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS  

(Dollars in millions, except per share data)                             (Unaudited) 

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