Audit Committee Charter

 

(As approved by the Board of Directors on December 15, 2005)

Purpose

The Audit Committee is appointed by the Board of Directors (the ďBoardĒ) to assist the Board in fulfilling its oversight responsibility relating to (1) the integrity of the financial statements of Hercules Incorporated (the ďCorporationĒ), (2) the independent auditorís qualifications and independence, (3) the performance of the Corporationís internal and independent auditors, and (4) the compliance by the Corporation with legal and regulatory requirements related to accounting, auditing, financial reporting and/or internal control matters.

The Audit Committee shall prepare the report required by the rules of the Securities and Exchange Commission (the ďSECĒ) to be included in the Corporationís annual proxy statement.

Committee Membership

The Audit Committee shall consist of no fewer than three (3) members of the Board. The members of the Audit Committee shall meet the independence and experience requirements of the applicable stock exchanges (e.g., the New York Stock Exchange) and governmental agencies (e.g., the SEC); as such requirements may be in effect and amended from time to time. Without limiting the foregoing, all members of the Audit Committee must be ďfinancially literateĒ in the business judgment of the Board or become so within a reasonable period of time. At least one member of the Audit Committee shall be a financial expert as defined by the applicable rules and regulations of the SEC. If any member of the Audit Committee simultaneously serves on the Audit Committee of more than three public companies, the Board must make a determination as to whether the simultaneous service would impair the ability of the member to effectively serve on the Audit Committee and disclose the determination in the Corporationís annual proxy statement.

The members of the Audit Committee and the Chair of the Audit Committee shall be appointed by the Board on the recommendation of the Corporate Governance, Nominating and Ethics Committee.

Meetings

The Audit Committee shall meet as often as it determines, but at least quarterly. The Audit Committee shall meet periodically with management, internal auditors, and the independent auditor in separate executive sessions. The Audit Committee may request any officer or employee of the Corporation or the Corporationís outside counsel or independent auditor to attend a meeting of the Audit Committee or to meet with any members of, or consultants to, the Audit Committee.

Committee Authority and Responsibilities

The Audit Committee shall have the sole authority to appoint or replace the independent auditor. The Audit Committee shall be directly responsible for the compensation and oversight of the work of the independent auditor (including resolution of disagreements between management and the independent auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work. The independent auditor shall report directly to the Audit Committee.

The Audit Committee shall preapprove, prior to the completion of the audit, all auditing services and permitted non-audit services (including the fees and terms thereof) to be performed for the Corporation by its independent auditor, subject to the de minimis exceptions for non-audit services under rules established by the SEC. The Audit Committee may form and delegate authority to subcommittees consisting of one (1) or more members when appropriate, including the authority to grant preapprovals of audit and permitted non-audit services, provided that decisions of such subcommittee to grant preapprovals shall be presented to the full Audit Committee at its next scheduled meeting.

The Audit Committee shall have the authority, to the extent it deems necessary or appropriate, to retain independent legal, accounting or other advisors and shall have access to all Company records. The Corporation shall provide for appropriate funding, as determined by the Audit Committee, for payment of compensation to the independent auditor for the purpose of rendering or issuing an audit report and to any advisors employed by the Audit Committee.

The Audit Committee shall make regular reports to the Board. At least annually, the Audit Committee shall review and reassess the adequacy of this Charter and shall report the results of this review to the Board, including any recommended amendments to this Charter. The Audit Committee will have an annual performance evaluation of its own effectiveness conducted by the Corporate Governance, Nominating, and Ethics Committee. The results of this evaluation will be reported to the Board, including any recommended changes to the policies and procedures of the Audit Committee.

The Audit Committee, to the extent it deems necessary or appropriate, shall:

Financial Statement and Disclosure Matters

1. Review and discuss the Corporationís annual and quarterly financial statements prior to filing with the SEC, including reviewing the independent auditorís judgments about the quality and appropriateness of the Corporationís accounting principles as applied in its financial reporting, and the Corporationís specific disclosures under ďManagementís Discussion and Analysis of Financial Condition and Results of Operations.Ē

2. Discuss with management and the independent auditor significant financial reporting issues and judgments made in connection with the preparation of the Corporationís financial statements, including any significant changes in the Corporationís selection or application of accounting principles, any major issues as to the adequacy of the Corporationís internal controls, and any special steps adopted in light of material control deficiencies.

3. Discuss with Management and the independent auditor:

         Any significant transactions that are not a normal part of the Corporationís business.

         The quality of accounting principles and estimates utilized by management.

         Any significant adjustments proposed by either the independent auditor or internal auditor and not recorded.

         Any significant recommendations that the independent auditor or internal auditor may have with respect to improving financial controls, choice of accounting principles or management reporting systems.

4. Review and discuss with management and the independent auditor the Corporationís annual internal control report, including any attestation of same by the independent auditor prior to the filing of the Corporationís Form 10-K.

5. Review and discuss quarterly reports from the independent auditor on:

(a) All critical accounting policies and practices to be used.

(b) All alternative treatments of financial information within generally accepted accounting principles (ďGAAPĒ) that have been discussed with management, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the independent auditor.

(c) Other material written communications between the independent auditor and management, such as any management letters or schedule of unadjusted differences.

6. Prior to public release of relevant financial statements, discuss with management and the independent auditor the Corporationís earnings press releases, including the use of ďpro formaĒ or ďadjustedĒ non-GAAP information, as well as financial information and earnings guidance periodically provided to analysts and rating agencies. Such discussion may be done generally (consisting of discussing the types of information to be disclosed and the types of presentations to be made).

7. Discuss with management and the independent auditor the effect of regulatory and accounting initiatives as well as off-balance sheet structures on the Corporationís financial statements and any report or opinion proposed to be rendered in connection therewith.

8. Discuss with management the Corporationís major financial risk exposures and the steps management has taken to monitor and control such exposures, including the Corporationís risk assessment and risk management policies.

9. Discuss with the independent auditor the matters required to be discussed by Statement on Auditing Standards No. 61 relating to the conduct of the audit, including any difficulties encountered in the course of the audit work, any restrictions on the scope of activities or access to requested information, and any significant disagreements with management.

10. Review disclosures made to the Audit Committee by the Corporationís Chief Executive Officer and Vice President and Chief Financial Officer during their certification process for the Form 10-K and Form 10-Q about any significant deficiencies in the design or operation of internal controls or material weaknesses therein and any fraud involving management or other employees who have a significant role in the Corporationís internal controls.

11. Review and discuss the adequacy and effectiveness of the Corporationís disclosure controls and procedures and managementís reports thereon.

Oversight of the Corporationís Relationship with the Independent Auditor

12. Obtain and review a report from the independent auditor, at least annually, regarding (a) the independent auditorís internal quality-control procedures, (b) any material issues raised by the most recent internal quality-control review, or peer review, of the firm, or by any inquiry or investigation by governmental or professional authorities within the preceding five (5) years respecting one or more independent audits carried out by the firm, (c) any steps taken to deal with any such issues, and (d) all relationships between the independent auditor and the Corporation. Evaluate the qualifications, performance and independence of the independent auditor, including considering whether the auditorís quality controls are adequate and the provision of permitted non-audit services is compatible with maintaining the auditorís independence, and taking into account the opinions of management and internal auditors. Review and evaluate the lead partner of the independent auditor. The Audit Committee shall present its conclusions with respect to the independent auditor to the Board.

13. Ensure the rotation of the audit partners as required by law.

14. Recommend to the Board policies for the Corporationís hiring of employees or former employees of the independent auditor who participated in any capacity in the audit of the Corporation.

15. The independent auditor will report all issues that have been discussed with their national office to the Audit Committee. To the extent determined necessary or appropriate, the Audit Committee will discuss these issues with the national office of the independent auditor as well as matters of audit quality and consistency.

16. Meet with the independent auditor prior to the audit to discuss the planning and staffing of the audit.

Oversight of the Corporationís Internal Audit Function

17. Review the appointment and replacement of the Director of Internal Audit. In joint consultation with the Human Resources Committee, determine compensation and incentives of Director of Internal Audit.

18. Review the significant reports to management prepared by the Internal Audit Department and managementís responses.

19. Review the budget and staffing, the organizational structure, and the qualifications of the members of the Internal Audit Department. Review the Internal Audit Department plan for the year and any material changes to that plan. Review any difficulties encountered by the internal auditors in the course of their audits, including any restrictions on the scope of their work or access to required information.

Compliance Oversight Responsibilities

20. Obtain from the independent auditor assurance that, if the independent auditor detects or becomes aware of any illegal act, the Audit Committee will be adequately informed, and that a report has been provided to the Audit Committee if the independent auditor has reached specific conclusions with respect to such illegal acts.

21. Review reports and disclosures of insider and affiliated party transactions. Review a summary of compliance with the Corporationís Business Practices Policy.

22. Review, recommend and approve changes, as appropriate, to the Corporationís Code of Ethics for Senior Financial Executives and monitor compliance with this code.

23. Establish procedures (including a process that allows for direct communication to the Audit Committee or their designee of certain matters as determined by the Audit Committee) for the receipt, retention and treatment of complaints received by the Corporation regarding accounting, internal accounting controls or auditing matters, and the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters.

24. Discuss with management, including the General Counsel, and the independent auditor any correspondence with regulators or governmental agencies and any published reports that raise material issues regarding the Corporationís financial statements or accounting policies.

25. Discuss with the Corporationís General Counsel legal matters that may have a material impact on the financial statements or the Corporationís compliance policies.

26. Review policies and procedures with respect to expense accounts and perquisites of officers and Directors, including their use of corporate assets; and consider the results of an annual review of expenses and perquisites of officers and Directors by Internal Audit or the independent public accountant.

27. With respect to the Audit Committeeís compliance oversight responsibilities in general, and in particular the foregoing paragraphs (20) through (26) inclusive, it is intended, understood and provided that the Boardís oversight of Company compliance matters shall be effectuated through the Audit Committee and the Corporate Governance, Nominating and Ethics Committee as follows: (i) compliance matters which are primarily related to accounting, auditing, financial reporting, and/or internal controls shall be submitted to the Audit Committee, and the Audit Committee shall determine the proper handling thereof (including the involvement of other Board committees, outside advisers and others) with such oversight by the Board as the Board determines is appropriate, (ii) compliance matters which are not primarily related to accounting, auditing, financial reporting and/or internal controls shall be submitted to the Corporate Governance, Nominating and Ethics Committee, and the Corporate Governance, Nominating and Ethics Committee shall determine the proper handling thereof (including the involvement of other Board committees, outside advisers and others) with such oversight by the Board as the Board determines is appropriate, and (iii) if there is doubt as to whether the foregoing (i) or (ii) is applicable to particular compliance matter(s) in question, then such compliance matter(s) shall be submitted jointly to the Chair of the Audit Committee and the Chair of the Corporate Governance, Nominating and Ethics Committee and the two chairs will decide whether the foregoing (i) and/or (ii) is applicable.

28. Assess whether management has a review system in place that is reasonably designed to satisfy the legal requirements with respect to the Corporationís financial statements, reports, and other financial information disseminated to governmental organizations, and the public.

Limitation of Audit Committeeís Role

While the Audit Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Audit Committee to plan or conduct audits or to determine that the Corporationís financial statements and disclosures are complete and accurate and are in accordance with GAAP and applicable rules and regulations. These are the responsibilities of management and the independent auditor.