<PAGE>   1
                                                                      EXHIBIT 13




                             [LOGO] CHEMFIRST INC.

                               1998 ANNUAL REPORT




<PAGE>   2


[LOGO] CHEMFIRST PRODUCES CHEMICALS FOR SEMICONDUCTOR, LIFE SCIENCE, AND
       POLYURETHANE APPLICATIONS. THE COMPANY'S STOCK TRADES ON THE NEW YORK
       STOCK EXCHANGE UNDER THE SYMBOL CEM.

CONTENTS

<TABLE>
--------------------------------------------------------
<S>                                               <C>
Financial Highlights                                  1

--------------------------------------------------------

Selected Financial Data                               2

--------------------------------------------------------

Dear Fellow Shareholders                              3

--------------------------------------------------------

Electronic and Other Specialty Chemicals              7

--------------------------------------------------------

Polyurethane Chemicals                                9

--------------------------------------------------------

ChemFirst Companies                                  11

--------------------------------------------------------

Directors and Officers                               11

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Corporate Information                                12

--------------------------------------------------------

Financial Review                                  Insert

--------------------------------------------------------
</TABLE>



<PAGE>   3



FINANCIAL HIGHLIGHTS


<TABLE>
<CAPTION>
                                                              (In Thousands of Dollars, Except Per Share Amounts)
                                                             ----------------------------------------------------
                                                                          Years ended December 31,
                                                             ----------------------------------------------------
                                                                1998                  1997              %Change
                                                             ----------------------------------------------------
<S>                                                          <C>                   <C>                   <C>
Results of Operations:
        Sales                                                $ 305,104             $ 297,822                    2
        Earnings from continuing operations (a)              $  24,660             $  37,795                  (35)
        Depreciation and amortization                        $  23,688             $  17,254                   37
        Capital expenditures                                 $  43,786             $  91,442                  (52)

Financial Position:
        Total assets                                         $ 443,434             $ 433,097                    2
        Total debt                                           $  70,561             $  24,918                  183
        Shareholders' equity                                 $ 285,482             $ 321,697                  (11)
        Total debt as percent of total capitalization               20%                    7%                 186

Per Common Share:
        Earnings from continuing operations (a)              $    1.27             $    1.81                  (30)
        Cash dividends declared                              $     .40             $     .40                   --
        Book value                                           $   15.48             $   16.06                   (4)
        Closing market price at December 31                  $  19.750             $  28.250                  (30)

(a)     Includes special items after tax effect:
        Gain on sale of Power Sources, Inc.                  $   6,142             $      --   
        Provision for note received on aluminum dross sale   $    (458)            $      --   
        Gain on sale of Melamine Chemicals, Inc.             $      --             $   8,810
        Gain on Melamine technology sale                     $      --             $   1,502
        Earnings of former equity affiliates                 $      --             $     995
                                                             -------------------------------
                TOTAL                                        $   5,684             $  11,307
                                                             -------------------------------
                Per common share:                            $     .29             $     .54
                                                             -------------------------------
</TABLE>


<TABLE>
<CAPTION>
       [GRAPH]                      [GRAPH]                    [GRAPH]
<S>                          <C>                          <C>
Cash Flows Provided by       Earnings from                Capital Expenditures 
Continuing Operations        Continuing Operations*       (Millions of Dollars)
(Millions of Dollars)        (Millions of Dollars)
</TABLE>


*Adjusted for Power Sources gain and aluminum dross note provision in 1998,
Melamine gains and equity earnings in 1997, and equity earnings in years
1994-1996.



                                                                               1
<PAGE>   4


SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                   Years ended December 31,        
                                                       (In Thousands of Dollars, Except Per Share Amounts)
                                          -----------------------------------------------------------------------------
                                             1998           1997            1996            1995            1994
                                          -----------------------------------------------------------------------------
                                                      %              %               %                %               %
                                          -----------------------------------------------------------------------------
<S>                                       <C>         <C>  <C>       <C>  <C>       <C>    <C>        <C>   <C>      <C>
Sales to unaffiliated customers:
        Electronic and Other Specialty    $ 179,579   56   179,549   56   150,873   60     134,536    61    110,532  58
           Chemicals
        Polyurethane Chemicals              125,525   39   118,273   37    95,139   38      79,698    36     76,358  40
                                          ---------  ---  --------  ---   -------  ---    --------  ----   -------- ----
              Total sales                   305,104   95   297,822   93   246,012   98     214,234    97    186,890  98
        Other revenues                       16,436    5    22,130    7     5,015    2       6,717     3      3,460   2
                                          ---------  ---  --------  ---   -------  ---    --------  ----   -------- ----
        Total revenues                    $ 321,540  100   319,952  100   251,027  100     220,951   100    190,350 100
                                          =========  ===  ========  ===   =======  ===    ========  ====   ======== ===
Operating profit from
   continuing operations before
   income taxes, investee earnings:
        Electronic and Other Specialty    $  17,796         27,617         22,536           25,583           21,453
         Chemicals
        Polyurethane Chemicals               22,648         24,071         21,057           15,067           15,098
                                          ---------  ---  --------  ---   -------  ---    --------  ----   -------- ----
                                             40,444         51,688         43,593           40,650           36,551
Unallocated corporate expenses               (9,781)       (11,347)       (13,324)         (15,888)          (9,910)
Interest income (expense), net                  213          3,009         (3,926)          (3,777)          (6,939)
Other income, net                             9,224         14,998            259            1,324            1,372
                                          ---------  ---  --------  ---   -------  ---    --------  ----   -------- ----
                                             40,100         58,348         26,602           22,309           21,074
Income taxes                                 15,440         23,050         10,471           10,327            9,354
Equity in net earnings of equity
        investees                                --          2,497            846            1,096              410
                                          ---------  ---  --------  ---   -------  ---    --------  ----   -------- ----
Earnings from continuing operations          24,660         37,795         16,977           13,078           12,130
Earnings (loss) from discontinued
        operations, net of taxes             (2,618)         1,103          9,144           44,389           29,628
Net gain (loss) on disposal of 
        businesses, net of taxes            (11,950)            --        223,739               --               -- 
                                          ---------  ---  --------  ---   -------  ---    --------  ----   -------- ----
              Net earnings                $  10,092         38,898        249,860           57,467           41,758
                                          =========  ===  ========  ===   =======  ===    ========  ====   ======== ====  


Earnings (loss) per common share:
        Continuing operations             $    1.28          1.85             .83              .64              .60
        Discontinued operations                (.14)          .06             .44             2.16             1.48
        Gain (loss) on disposal of
                businesses                     (.62)           --           10.85               --               -- 
                                          ---------  ---  -------   ---   -------  ---    --------  ----   -------- ----
              Net earnings                $     .52          1.91           12.12             2.80             2.08
                                          =========  ===  =======   ===   =======  ===    ========  ====   ======== ====  
Earnings (loss) per common share,
        assuming dilution: 
        Continuing operations             $    1.27          1.81             .81              .63              .60
        Discontinued operations                (.14)          .05             .44             2.12             1.45
        Gain (loss) on disposal                                                                                    
                of businesses                  (.61)           --           10.70               --               --
                                          ---------  ---  -------   ---   -------  ---    --------  ----   -------- ----
              Net earnings                $     .52          1.86           11.95             2.75             2.05
                                          =========  ===  =======   ===   =======  ===    ========  ====   ======== ====  
Net working capital                       $ 116,936        79,936         136,901          127,009          100,421       
Long-term debt                            $  64,956         3,941             606           80,598           95,057       
Total assets                              $ 443,434       433,097         394,164          390,346          371,328       
Stockholders' equity                      $ 285,482       321,697         308,486          226,757          204,708       
Cash dividend payout rate                             76           20               3               14               18   
Return on average equity -                                                                                                
        continuing operations                          8           12               6                6                7   
Return on sales - continuing                                                                                              
        operations                                     8           13               7                6                6   
Long-term debt/equity ratio                     .23           .01              --              .36              .46       
Current ratio                                  3.66          2.19            3.85             3.81             4.69       
Cash dividends per share                  $     .40           .40             .40              .39              .31       
Book value per share                      $   15.48         16.06           14.92            11.02            10.07       
</TABLE>F


2

<PAGE>   5

[LOGO]

Dear Fellow Shareholders

CHEMFIRST PRODUCES CHEMICALS FOR ELECTRONIC, PHARMACEUTICAL, POLYMER,
AGRICULTURAL, AND POLYURETHANE MARKETS. WE ARE NOW EXCLUSIVELY FOCUSED ON
CHEMICALS. WE HAVE RECLASSIFIED ENGINEERED PRODUCTS AND SERVICES AS DISCONTINUED
OPERATIONS IN ADDITION TO STEEL PENDING DISPOSITION OF THESE BUSINESSES. DURING
THE YEAR WE MADE SUBSTANTIAL INVESTMENTS IN TECHNOLOGY AND CAPACITY ADDITIONS TO
BUILD ON MARKET AND TECHNOLOGY LEADERSHIP IN CHEMICALS AND TO TAKE ADVANTAGE OF
GROWTH OPPORTUNITIES. WE EXPECT TO SEE RESULTS IN 1999.

         EARNINGS IN 1998 SUFFERED FROM DEPRESSED CONDITIONS IN MANY OF OUR
MARKETS. VOLUME DECLINED AND PRICES FELL FOR SOME PRODUCTS DUE TO WEAKER DEMAND,
EXCESS CAPACITY, THE STRONG DOLLAR, AND DETERIORATING ECONOMIES IN THE FAR EAST
AND OTHER PARTS OF THE WORLD. AGRICULTURAL CHEMICAL DEMAND ALSO FELL DUE TO
COMPETITION FROM BIOTECHNOLOGY. UNUSUAL AND HOPEFULLY NONRECURRING PRODUCTION
PROBLEMS ALSO HURT RESULTS.

         Earnings from continuing operations excluding special items were down
about 30% versus 1997. Peer company earnings were also down, about 25%. The
decline in our earnings reflected development expenses for chemical mechanical
planarization (CMP) for electronic chemical markets as well as the other factors
noted above. Total sales of $305 million were about the same as last year. A 22%
increase in electronic chemical sales was offset by decreased sales in other
areas.

         Continuing operations include Electronic and Other Specialty Chemicals
and Polyurethane Chemicals. Emphasis is on chemicals and services for the
semiconductor industry where rapid technology change is creating more and more
opportunities for growth. We intend to build on our market and technology
leadership to take advantage of these opportunities.

FINANCIAL RESULTS

         Earnings from continuing operations were $24.7 million, or $1.27 per
share, including special items of 29 cents per share primarily from a gain on
the sale of former equity affiliate Power Sources, Inc.

         Results were disappointing following record chemical sales and earnings
last year. However, we made good progress positioning the company in key markets
for future growth. The new Baytown, Texas, aniline facility came on line in
April as planned and operated above design capacity by year end. We introduced
second-generation CMP products for customer trials, established research and
development and production facilities in Japan, and added production capability
for ultra-pure electronic chemicals. The deep ultraviolet (DUV) resins business
acquired last year was profitable and is growing.



Total Sales
(Millions of Dollars)

[GRAPH]



                                                                               3
<PAGE>   6


CAPITAL EXPENDITURES

         CAPITAL EXPENDITURES FOR 1998 WERE $44 MILLION, PRIMARILY FOR
COMPLETION OF THE WORLD SCALE ANILINE FACILITY LOCATED AT BAYER CORPORATION'S
BAYTOWN CHEMICAL COMPLEX. THIS PLANT MORE THAN DOUBLED OUR ANILINE CAPACITY. A
PLANNED SECOND PHASE WILL ADD ANOTHER 250 MILLION POUNDS AND WILL BRING TOTAL
ANILINE CAPACITY TO ABOUT 740 MILLION POUNDS WHEN COMPLETED.

         CAPITAL EXPENDITURES IN 1999 WILL BE ONLY ABOUT $30 MILLION FOLLOWING
RECORD EXPENDITURES OVER THE PAST THREE YEARS THAT INCREASED PRODUCTION CAPACITY
IN MAJOR PRODUCT LINES 40% TO 100%. CAPITAL PROJECTS IN 1999 WILL BE PRIMARILY
FOR LAB EQUIPMENT AND PRODUCTION IMPROVEMENTS IN ELECTRONIC CHEMICALS,
MAINTENANCE AND PROCESS AND PRODUCTION IMPROVEMENTS IN OTHER AREAS, AND
COMPLETION OF AN ENTERPRISE RESOURCE PLANNING SYSTEM TO UPGRADE AND INTEGRATE
INFORMATION SYSTEMS.

         We do not anticipate major acquisitions. Our focus has been and
continues to be on product-line and technology acquisitions that build on and
extend our existing base of products and technologies. 

FINANCIAL STRUCTURE

         The balance sheet is strong. Debt is 20% of total capitalization. This
is below our long-term target of 35% and the 36% average of peer companies.

         Our former subsidiary Getchell Gold has agreed to merge with Placer
Dome. This will accelerate repayment of a $29 million note to the company.
Following receipt of this repayment and cash from the planned dispositions of
Steel and Engineered Products, financial leverage will decrease further. Excess
cash will be used to reduce debt and repurchase stock and to make product line
and technology acquisitions that complement and extend our existing businesses,
given the right opportunity.

         We spent nearly $43 million to repurchase 1.8 million shares of
ChemFirst stock in 1998 and are now working on an additional $50 million
repurchase authorization. We believe stock repurchases are a tax efficient way
to return value to shareholders when other attractive investment opportunities
are not available. 

ELECTRONIC AND OTHER SPECIALTY CHEMICALS

         ChemFirst is the global market leader in advanced cleaners for
back-end-of-the-line high-value applications in semiconductor production. Sales
volume of our HDA(R)products was up 15% for the year in spite of problems in the
semiconductor industry, which experienced a 4% decline in silicon acreage and a
drop in use of semiconductor materials of nearly 8%. In 1999 silicon acreage
growth is projected at 2% and materials growth at 6%. We should benefit from
this growth and from new product introductions.

         During the year we completed an applications lab in Japan to service
semiconductor manufacturers in this market. Japan represents approximately 40%
of the global market for cleaners and removers. Our current market share there
is relatively small. So we view Japan as a growth opportunity.

         Growing use of DUV photolithography and CMP is being driven by the
industry shift to smaller feature sizes and increased chip complexity. Chip
geometry is moving from 0.25 to 0.18 micron about 18 months ahead of the
semiconductor industry roadmap.

CAPITAL EXPENDITURES
[PIE CHART]

IDENTIFIABLE ASSETS
[PIE CHART]

EMPLOYEES
[PIE CHART]


[GRAPH]
Electronic and Other Specialty Chemical Sales
(Millions of Dollars)

4

<PAGE>   7


THIS REQUIRES ADVANCED DUV PHOTOLITHOGRAPHY. WE ARE THE LARGEST SUPPLIER OF DUV
PHOTORESIST RESINS INTO THIS RAPIDLY GROWING GLOBAL MARKET.

         CMP MARKETS ARE ALSO GROWING. THE PLANARIZED SURFACES CREATED BY CMP
PERMIT SHORTER WAVELENGTH, HIGH-RESOLUTION DUV LITHOGRAPHY REQUIRED FOR THE
SMALLER GEOMETRIES OF HIGHER PERFORMANCE CHIPS.

         OTHER SPECIALTY CHEMICALS INCLUDE PRODUCTS FOR PHARMACEUTICAL,
AGRICULTURAL, POLYMER, PHOTOGRAPHIC, AND PHOTOSENSITIVE APPLICATIONS. WE TAKE
PRODUCTS FROM RESEARCH AND DEVELOPMENT THROUGH COMMERCIAL PRODUCTION FOR BOTH
PROPRIETARY AND CUSTOM CHEMICALS. OUR STRATEGY IS TO IDENTIFY AND CAPITALIZE ON
GROWTH OPPORTUNITIES IN NICHE MARKETS FOR PROPRIETARY PRODUCTS AND PRODUCTION
PROCESSES. WE ARE THE ONLY U.S. PRODUCER OF MANY NITROTOLUENES AND DERIVATIVES.
ALTHOUGH MANY MARKETS FOR THESE PRODUCTS ARE MATURE, THIS IS A GOOD NICHE FOR US
BECAUSE OF OUR UNIQUE SUPPLY POSITION. MARKET CONDITIONS PROMPTED PRICE CUTS TO
PROTECT SUPPLY POSITIONS IN 1998. WE HOPE FOR MORE STABLE PRICES IN 1999, BUT
WILL CONTINUE TO DEFEND OUR MARKET SHARE.

POLYURETHANE CHEMICALS    

        Aniline production is back on track following first-half production
problems and a third-quarter hurricane at Pascagoula. The Baytown aniline plant
started up in March 1998 and is running near design capacity. Demand is good,
and we expect to operate at full rate in 1999 with a substantial increase in
revenues and earnings. We are the industry's largest merchant producer of
aniline.

        Cash flow from this business is greater than reinvestment opportunities
except for intermittent large projects. We view it as a source of funds for
growth in other areas.

OUTLOOK

        Although the first half will probably be weaker than last year, we
expect the year to be better helped by increased aniline and electronic chemical
sales. A 10% workforce reduction and other cost cuts, which amounted to about 5%
of total fixed costs, will also help 1999 results. This may be offset to some
degree by slightly higher interest expense and possibly some below-the-line
expenses associated with discontinued businesses.




                                   /s/ J. KELLEY WILLIAMS                 
                                                                          
                                   J. Kelley Williams                     
                                   Chairman and Chief Executive Officer   
                                                                          
                                                                          
                                                                          
                                   /s/ R. MICHAEL SUMMERFORD              
                                                                          
                                   R. Michael Summerford                  
                                   President and Chief Operating Officer  
                                   




POLYURETHANE CHEMICAL
SALES
(Millions of Dollars)

[GRAPH]


                                                                               5
<PAGE>   8

ELECTRONIC AND OTHER SPECIALTY CHEMICALS SALES

POLYURETHANE CHEMICALS SALES

[PIE CHART]


ELECTRONIC AND OTHER SPECIALTY CHEMICALS

PRODUCTS INCLUDE:

Residue and photoresist removers, post-clean treatments, CMP slurries, DUV
resins, pharmaceutical, agricultural and color intermediates, photoinitiators,
and polymer promoters and inhibitors.

ULTIMATE CONSUMER MARKETS

Personal computers, flat panel displays and disk drives, AIDS and high blood
pressure drugs, fungicides, herbicides, insecticides, color film developers,
laundry detergents, adhesives, inks, and coatings.

COMPETITIVE ADVANTAGES

Global presence, market leader, customer support, flexible process capability,
and proprietary technology.


POLYURETHANE CHEMICALS

PRODUCTS INCLUDE:

Aniline and nitrobenzene.

ULTIMATE CONSUMER MARKETS

Residential and commercial insulation, automobile bumper and body components,
herbicides, tires, and acetaminophen.

COMPETITIVE ADVANTAGES

Low-cost producer, innovative technology, and long-term customer relationships.



6
<PAGE>   9
ELECTRONIC AND OTHER SPECIALTY CHEMICALS

        THE COMPANY PRODUCES CHEMICALS FOR USE IN THE MANUFACTURE OF
SEMICONDUCTOR CHIPS AND FOR AGRICULTURAL, PHARMACEUTICAL, POLYMER, AND
PHOTOSENSITIVE APPLICATIONS. OBJECTIVES ARE TO DEVELOP AND MARKET PROPRIETARY,
HIGH-VALUE SPECIALTY CHEMICALS AND TO PROVIDE RESEARCH AND SCALE-UP PRODUCTION
FOR CUSTOMER PROCESSES. 

ELECTRONIC CHEMICALS

        THE COMPANY PRODUCES ORGANIC PHOTORESIST REMOVERS, POST-DRY-ETCH POLYMER
REMOVERS, DEEP ULTRAVIOLET RESINS FOR PRODUCTION OF PHOTORESISTS, AND OTHER
PERFORMANCE CHEMICALS AND MATERIALS FOR CLEANING AND POLISHING SILICON WAFERS IN
SEMICONDUCTOR MANUFACTURING. PRODUCTS ARE SOLD ON THE BASIS OF PRODUCT FUNCTION,
PURITY, AND CLEANNESS. THE COMPANY'S APPLICATIONS ENGINEERS WORK CLOSELY WITH
CUSTOMERS TO DEVELOP UNIQUE CHEMICAL SOLUTIONS TO ADVANCED SEMICONDUCTOR
MANUFACTURING ISSUES. PRODUCT PERFORMANCE, APPLICATIONS ENGINEERING SUPPORT, AND
SERVICE ARE KEY TO CUSTOMER SATISFACTION AND COMPETITIVE ADVANTAGE.

        Semiconductor growth is being driven by the increasing use of personal
computers and the proliferation of other electronic devices such as digital
television, digital cameras, and wireless communications; by the growing
acceptance of Internet applications and Web TV; and by the need to increase
device performance, speed, and capacity. In addition, new products containing
logic devices are being developed and introduced routinely for an increasing
number of office, home, and automotive applications. All of these devices
require high performance integrated circuits.

REMOVER PRODUCTS

        The company is the world's largest supplier of post-dry-etch polymer
removers and the second largest supplier of photoresist removers. Production
facilities and applications engineering labs in Hayward, California; East
Kilbride, Scotland; and Kawasaki-City, Japan, are strategically located near key
regional semiconductor production centers. Patented HDA(R) polymer removers
effectively remove residues formed during dry etching of silicon wafers and
continue to be the fastest-growing products in the history of the company. They
increase yields and improve chip performance, which translates into lower costs
and higher margins for chip manufacturers. This technology has established the
company as a leader in the electronic chemicals industry.

CHEMICAL MECHANICAL PLANARIZATION (CMP)

        In January 1998, the company entered the CMP market through two
product-line acquisitions. These acquisitions provided ChemFirst with CMP
technologies, products and customers, slurry manufacturing equipment,
applications labs, and exclusive supply positions for proprietary powders and
abrasives used in CMP slurries.



ELECTRONIC AND OTHER SPECIALTY CHEMICALS
RESULTS OF OPERATIONS
In Thousands of Dollars

<TABLE>
<CAPTION>
                                 1998         1997      % Change
<S>                          <C>           <C>          <C> 
Sales                         179,579      179,549            --

Pretax operating results       17,796       27,617           (36)

Capital expenditures           25,306       36,692           (31)
</TABLE>


HIGHLIGHTS

ESTABLISHED AN ELECTRONIC CHEMICALS APPLICATIONS LAB IN JAPAN.

INTRODUCED NEW MATERIALS FOR CMP APPLICATIONS IN ADVANCED CHIP PRODUCTION
PROCESSES.

COMPLETED A $4.5 MILLION EXPANSION FOR PRODUCTION OF DUV PHOTORESIST RESINS.

ESTABLISHED CUSTOM CHEMICAL SERVICES CAPABILITY FOR CONTRACT RESEARCH, SAMPLES,
AND SMALL-SCALE PRODUCTION FOR FINE CHEMICALS CUSTOMERS.

[CMP SLURRIES PHOTO]

                                                                               7
<PAGE>   10
During the year, the company introduced new proprietary remover products that
facilitate the use of advanced copper interconnects for tomorrow's semiconductor
devices. These products permit cleaning of copper without corrosion or surface
etching while maintaining compatibility with low-k dielectric materials.

        CMP IS RAPIDLY BECOMING AN ESSENTIAL SEMICONDUCTOR PROCESS FOR THE
PRODUCTION OF ADVANCED LOGIC AND MEMORY DEVICES. THE CMP PROCESS INVOLVES
POLISHING THE OXIDE (INSULATING) LAYERS AND THE METAL (CONDUCTOR) LAYERS DURING
SEMICONDUCTOR FABRICATION USING A SLURRY OF ABRASIVES AND CHEMICALS TO PRODUCE A
FLAT OR PLANARIZED SURFACE. FLATTER SURFACES ENABLE THE USE OF SHORTER
WAVELENGTH, HIGH-RESOLUTION LITHOGRAPHY SUCH AS THE NEW DEEP ULTRAVIOLET (DUV)
LITHOGRAPHY TO CREATE THE SMALLER LINE-WIDTH GEOMETRIES NEEDED FOR FUTURE
GENERATIONS OF SMALLER, HIGHER PERFORMANCE, AND FASTER INTEGRATED CIRCUITS. THE
COMPANY'S FOCUS IS ON DEVELOPING PRODUCTS AND MATERIALS FOR METAL CMP
APPLICATIONS AND POST-CMP CLEANING.

        Several leading semiconductor manufacturers have announced major
programs to advance the use of copper as an interconnect layer using a new
inlaying or damascene process. Chips made using the damascene process are
faster, less expensive, and more energy efficient than chips made with
conventional processes. Copper damascene processing requires metal CMP.

DEEP ULTRAVIOLET (DUV) RESINS

        The company supplies DUV resins to photoresist manufacturers for
production of DUV photoresist used in leading edge manufacture of semiconductor
chips.

        In DUV photolithography, a thin film of DUV photoresist is applied to a
highly polished, ultra-pure silicon wafer. This film is then exposed to DUV
light through a pattern mask followed by development, ion implantation, etching,
and other procedures. This processing sequence creates single-layer circuit
tracings onto a wafer and is repeated as necessary to ultimately achieve the
complex, multi-layer circuitry of finished semiconductors.

        Growing use of DUV photolithography in semiconductor production is
driven by the trend toward smaller chip geometry for increased productivity
(number of chips per wafer). Smaller design geometries with feature sizes below
0.25 micron are achieved by using DUV photolithography. The company currently is
the largest supplier of products to the global DUV photoresist resin market.

OTHER SPECIALTY CHEMICALS

        The company manufactures specialty chemicals using both proprietary and
customer technology. Markets include agricultural, pharmaceutical, polymer,
photographic, dye and pigment and photosensitive applications.

                               [DUV RESINS PHOTO]

ELECTRONIC CHEMICALS GLOSSARY

CHEMICAL MECHANICAL PLANARIZATION-A process that uses both chemical reactions
and mechanical forces simultaneously to remove materials from a surface.

CHIP-A single square or 
rectangular piece of semiconductor material into which a specific electrical
circuit has been fabricated. Also called an integrated circuit or discrete
device.

DAMASCENE-A process using inlaid metal (e.g., copper) to form interconnects
between devices on a chip.

DEEP ULTRAVIOLET OR DUV- Refers to the electromagnetic spectrum where the
wavelength of light is less than 300 nanometers.

DIELECTRIC-A non-conductor of current, an insulator.

DRY ETCH-The process that uses radio frequency energy and gas phase chemicals to
remove a specific layer during semiconductor processing.

FABRICATION-The process of making devices in semi-conductor wafers.

FEATURE SIZE-The smallest line width or spacing between lines or features on a
semiconductor chip.

INTERCONNECT-The conductors among elements on an integrated circuit or between
components on a printed circuit board.

k (as in low-k)-A constant value used to evaluate a dielectric's insulating
properties. The better the insulating properties, the lower the k value.

LINE WIDTH-Width of an opaque line. Usually refers to a dimension on a mask or a
feature on an integrated circuit.



8
<PAGE>   11

LOGIC-Computer circuitry

MASK-A transparent plate covered with an array of patterns used in making
integrated circuits by exposing photoresist that defines areas to be later
etched on a wafer.

MEMORY-A general term for computer hardware that holds information in electrical
or magnetic form.

MICRON-A micrometer. One-millionth of a meter. About 40 millionths of a inch.
Symbol is [illegible].

NANO-A prefix meaning one-billionth. Symbol is n.

PHOTOLITHOGRAPHY-Lithographic techniques involving light as the pattern transfer
medium.

PHOTORESIST-A light-sensitive liquid that is spread as a uniform thin film on a
wafer or substrate. After baking, exposure of specific patterns is performed
using a mask.

PLANAR-Existing essentially in a single plane.

SEMICONDUCTOR-A material with properties of both a conductor and an insulator.
Common semiconductors include silicon and germanium.

SILICON (Si)-The basic element used in most semiconductor devices, i.e., diodes,
transistors, and integrated circuits.

STRIPPING-The process of completely removing a coating such as photoresist.

WAFER-A thin disk of semiconductor material (usually silicon) on which many
separate chips can be fabricated.

WAVELENGTH-Distance between two successive points of a wave that vibrate in the
same phase.

Sources: 
Integrated Circuit Engineering Corporation
EKC Technology, Inc.

        THE COMPANY HAS VERSATILE LABORATORY AND MANUFACTURING FACILITIES,
INCLUDING A CGMP (CURRENT GOOD MANUFACTURING PRACTICES) PILOT PLANT, AND CAN
PRODUCE GRAM AND MULTI-TON QUANTITIES IN CGMP AND ISO-9000 MANUFACTURING
ENVIRONMENTS. MAJOR CUSTOMERS INCLUDE CHEMICAL AND PHARMACEUTICAL COMPANIES THAT
OUTSOURCE PRODUCTION TO CONCENTRATE ON RESEARCH AND MARKETING, TO CUT COSTS, AND
TO SPEED PRODUCT INTRODUCTIONS. THE COMPANY RECENTLY ESTABLISHED A CUSTOM
CHEMICAL SERVICES CAPABILITY TO PROVIDE CONTRACT RESOURCES, SAMPLES, AND
SMALL-SCALE PRODUCTION FOR FINE CHEMICAL CUSTOMERS. INNOVATIVE PROCESS
DEVELOPMENT, BROAD TECHNOLOGY PLATFORMS, EFFICIENT PRODUCTION IN CONTINUOUS AND
BATCH PROCESSES, COMPLIANCE EXCELLENCE, AND RESPONSIVE CUSTOMER SERVICE
CHARACTERIZE THE COMPANY AND MAKE IT ONE OF THE MOST COMPETITIVE CUSTOM
MANUFACTURERS IN THE UNITED STATES.

        The company manufactures chemicals for photo curing applications such as
printing inks, varnishes, lacquers, and adhesives. The photo curing process
utilizes ultraviolet light to convert liquid coatings or inks into a dry or
"cured" film. These products are energy efficient, have shorter curing cycles,
are more environmentally friendly than traditional processes, and create a
higher-quality, more durable finish. The company also produces chemicals for
pharmaceuticals, including protease inhibitors used in the treatment of AIDS,
and other chemical applications such as in herbicides, rubber processing
chemicals, photographic chemicals, optical brighteners, and dyestuffs and
pigments.

POLYURETHANE CHEMICALS

        The company is a major producer of aniline and nitrobenzene, with world
scale plants and long-term supply relationships with major chemical companies.
These products are produced in efficient, continuous process facilities.

        Aniline is the company's largest product. Approximately 75% of aniline
produced in the U.S. is used to manufacture MDI (methylene diphenyl
diisocyanate) used in polyurethane foams and in urethane elastomers used in
automobile body components. Other significant markets for aniline include tire
and agricultural chemicals and plastics for consumer goods.

        The company currently supplies all of Bayer Corporation's North American
aniline requirements under long-term contract from plants in Pascagoula,
Mississippi, and Baytown, Texas.


THE COMPANY RECENTLY ESTABLISHED CUSTOM CHEMICAL SERVICES CAPABILITY FOR
CONTRACT RESEARCH, SAMPLES, AND SMALL-SCALE PRODUCTION FOR FINE CHEMICAL
CUSTOMERS. THIS BUSINESS ENABLES THE COMPANY TO SERVE AS A SINGLE-SOURCE
PROVIDER AND TAKE PRODUCTS FROM R&D TO COMMERCIAL PRODUCTION.





                                                                               9
<PAGE>   12

MOST OF THE COMPANY'S ANILINE PRODUCTION IS USED IN THE MANUFACTURE OF MDI, USED
TO MAKE POLYURETHANE, INCLUDING RIGID FOAMS FOR INSULATION IN HOME AND
COMMERCIAL CONSTRUCTION, REFRIGERATORS, FREEZERS, AND HOT WATER HEATERS. MDI
ALSO IS USED AS A BINDER FOR WOOD PRODUCTS AND IN ELASTOMERS USED IN GASKETS AND
BELTING APPLICATIONS, AND ENERGY-ABSORBING FOAMS USED TO MAKE AUTOMOBILE AND
TRUCK BUMPERS AND BODY PANELS.

        NITROBENZENE IS USED TO MAKE ANILINE AND IS SOLD SEPARATELY FOR THE
MANUFACTURE OF PHARMACEUTICALS, RUBBER CHEMICALS, AND AGRICULTURAL CHEMICALS.

        ANILINE AND NITROBENZENE ARE SOLD IN BULK AND DISTRIBUTED BY RAIL, 
TRUCK, BARGE, AND SHIP DEPENDING ON THE SIZE AND DESTINATION OF THE SHIPMENT.

        DURING THE YEAR, THE COMPANY COMPLETED CONSTRUCTION AND STARTED
PRODUCTION OF THE WORLD SCALE, 250-MILLION-POUND-PER-YEAR ANILINE FACILITY
LOCATED AT BAYER'S BAYTOWN, TEXAS, CHEMICAL COMPLEX. THE FACILITY IS AN INTEGRAL
PART OF BAYER'S U.S. MDI MANUFACTURING OPERATIONS. THIS PLANT, PHASE I OF A
TWO-PHASE PROJECT, MORE THAN DOUBLED THE COMPANY'S ANILINE CAPACITY. A PLANNED
SECOND PHASE WILL ADD ANOTHER 250 MILLION POUNDS OF CAPACITY, BRINGING TOTAL
ANILINE CAPACITY TO APPROXIMATELY 740 MILLION POUNDS WHEN COMPLETED.

RESEARCH AND DEVELOPMENT

        R&D activities identify new markets and applications, new and improved
process technologies, and new products. Applied research is sponsored at several
leading universities in the United States and Europe to complement in-house
efforts. University research programs have led to the successful development and
introduction of patented semiconductor wafer cleaners and performance polymers.

        The focus of R&D spending in 1998 was primarily on electronic chemicals,
including new CMP products for tungsten and copper applications and DUV resins
development for new photoresists. The company is working with new low-k
materials suppliers to develop chemistries and processes for these new materials
and with etch equipment manufacturers to develop removers for their new etch
recipes. Joint development and cooperative agreements with major semiconductor
equipment suppliers, materials suppliers, and key customers are leading to the
development of chemical solutions for problems related to the production of next
generation chips.



                            [PHOTO OF PLANT & LAB]

                            POLYURETHANE CHEMICALS

                            RESULTS OF OPERATIONS
                           In Thousands of Dollars



<TABLE>
<CAPTION>
                                  1998               1997           % Change
<S>                             <C>                <C>              <C>
Sales                           125,525            118,273              6

Pretax operating results         22,648             24,071             (6)

Capital expenditures             11,421             47,910            (76)
</TABLE>


HIGHLIGHTS

Completed construction and started production of the 250-million-pound-per-year
aniline facility at Baytown, Texas.

Became the sole supplier for Bayer Corporation's North American aniline
requirements. 


10
<PAGE>   13
<TABLE>
<CAPTION>
CHEMFIRST COMPANIES                       DIRECTORS                                        OFFICERS                              
<S>                                       <C>                                              <C>
First Chemical Corporation                Richard P. Anderson 2, 3                         J. Kelley Williams                    
(Polyurethane Chemicals and Specialty     Maumee, Ohio                                     Chairman                              
Chemicals)                                Chairman,                                        Chief Executive Officer               
P. O. Box 7005                            The Andersons,  Inc.                                                                   
Pascagoula, Mississippi 39568-7005        Agribusiness                                     R. Michael Summerford                 
-and-                                                                                      President                             
First Chemical Texas, L.P.                Paul A. Becker 1                                 Chief Operating Officer               
(Polyurethane Chemicals)                  Vero Beach, Florida                                                                    
P. O. Box 1607                            President,                                       Max P. Bowman                         
Baytown, Texas 77520                      Summit Investment Management                     Vice President, Finance               
George M. Simmons, President                                                               Treasurer                             
                                          James W. Crook 3, 4                                                                    
Quality Chemicals, Inc.                   Dataw, South Carolina                            Daniel P. Anderson                    
(Electronic and Specialty Chemicals)      Retired, Former Chairman of the Board,           Vice President                        
P. O. Box 216                             Melamine Chemicals, Inc.                         Health, Safety & Environmental Affairs
Tyrone, Pennsylvania 16686-0216                                                                                                  
-and-                                     Michael J. Ferris 2                              William B. Kemp                       
1515 Nicholas Road                        Houston, Texas                                   Vice President                        
Dayton, Ohio 45418                        President and Chief Executive Officer,           Human Resources                       
Scott Martin, President                   Pioneer Companies, Inc.                                                                
                                                                                           J. Steve Chustz                       
EKC Technology, Inc.                      James E. Fligg 2                                 General Counsel                       
(Electronic Chemicals)                    Chicago, Illinois                                                                      
2520 Barrington Court                     Executive Vice President,                        Troy B. Browning                      
Hayward, California 94545-3703            BP Amoco, p.l.c.                                 Controller                            
P. Jerry Coder, President                                                                                                        
                                          Robert P. Guyton 1                               James L. McArthur                     
EKC Technology, Ltd.                      Sea Island, Georgia                              Secretary                             
(Electronic Chemicals)                    Financial Consultant                             Manager, Investor Relations           
19 Law Place                                                                               
Nerston, Industrial Estate                Dr. Paul W. Murrill 1                          
East Kilbride                             Baton Rouge, Louisiana                         
Glasgow G74 4QL Scotland                  Professional Engineer                          
Connell Boyle, Managing Director                                                         
                                          William A. Percy, II 2, 4                      
EKC Technology, K.K.                      Greenville, Mississippi                        
(Electronic Chemicals)                    Chairman of the Board,                         
KSP R&D D3 42                             Staple Cotton Cooperative Association          
3-2-1 Sakado, Takatsu-ky, Kawasaki                                                       
Kanawaga, 213-0012 Japan                  Dan F. Smith 1                                 
Satoshi Kumasaka, Managing Director       Houston, Texas                                 
                                          President and Chief Executive Officer,         
TriQuest, L.P.                            Lyondell Chemical Company                      
(Electronic and Specialty Chemicals)                                                     
P. O. Box 819005                          Leland R. Speed 3                              
Dallas, Texas 75381-9005                  Jackson, Mississippi                           
Roger L. Van Duyne, President             Chairman,                                      
                                          EastGroup Properties                           
                                          Parkway Properties                             
                                          Real Estate Trust Companies                    
                                                                                         
                                          Dr. R. Gerald Turner 3, 4                      
                                          Dallas, Texas                                  
                                          President,                                     
                                          Southern Methodist University                  
                                                                                         
                                          J. Kelley Williams                             
                                          Jackson, Mississippi                           
                                          Chairman and Chief Executive Officer,          
                                          ChemFirst Inc.                                 
                                                                                         
                                          1 Audit Committee                              
                                          2 Compensation and Human Resources Committee   
                                          3 Committee on Director Affairs                
                                          4 ChemFirst Foundation Inc. Board of Trustees  
</TABLE>



<PAGE>   14
CORPORATE INFORMATION

TRANSFER AGENTS FOR COMMON STOCK

The Bank of New York
1-800-524-4458

Address shareholder inquiries to:
Shareholder Relations Department - 11E
P. O. Box 11258
Church Street Station
New York, New York 10286

Send certificates for transfer and address changes to:
Receive and Deliver Department - 11W
P. O. Box 11002
Church Street Station
New York, New York 10286

e-mail: 
Shareowner-svcs@bankofny.com

Internet: http://stock.bankofny.com

ChemFirst Inc.
Stock Transfer Department 
P.O. Box 1249
Jackson, Mississippi 39215-1249
(601) 948-7550
e-mail: ir@chemfirst.com

COMMON STOCK REGISTRARS 

The Bank of New York
Investor Relations Department
P. O. Box 11258
Church Street Station
New York, New York 10286

Deposit Guaranty National Bank
One Deposit Guaranty Plaza
Jackson, Mississippi 39205-1200

Stock Listing

New York Stock Exchange

Trading Symbol: CEM

Note: The Wall Street Journal and many other major daily newspapers list the
stock as "ChemFst."

INVESTOR RELATIONS

If you have questions concerning ChemFirst Inc. or your investment in the
company, we will be pleased to assist you. Contact:

James L. McArthur
Secretary, Manager, Investor Relations
ChemFirst Inc.
P.O. Box 1249
Jackson, Mississippi 39215-1249
(601) 949-0285 or (601) 948-7550 
e-mail: ir@chemfirst.com

INDEPENDENT PUBLIC ACCOUNTANTS

KPMG Peat Marwick, LLP
1100 One Jackson Place
Jackson, Mississippi 39201-9988

STOCKHOLDER REPORTS

Stockholders with stock in brokerage accounts who wish to receive quarterly
stockholder reports and other information directly from the company, may do so
by writing, calling or e-mailing the company's Investor Relations Department.
Quarterly earnings reports may also be accessed via the company's Internet site
located at www.chemfirst.com.

FORM 10-K

Stockholders may obtain without charge a copy of the ChemFirst Inc. 10-K as
filed with the Securities and Exchange Commission by calling or writing the
company's Investor Relations Department, or on the company's Internet site
located at www.chemfirst.com.

ANNUAL MEETING

The Annual Meeting of Stockholders will be held May 25, 1999, at 1:30 p.m. in
the Garden Room at Dennery's, 330 Greymont Avenue, Jackson, Mississippi.

Stockholders are cordially invited to attend and participate in the business of
the meeting. All stockholders are requested to return their proxy cards to the
Registrar in the envelope that accompanies the proxy.

                             [LOGO CHEMFIRST INC.]

STOCK MARKET INFORMATION

The high and low recorded prices of the company's common stock and cash
dividends declared during 1998 and 1997 are presented in the table below. There
were approximately 4,037 shareholders of record as of March 5, 1999.

<TABLE>
<CAPTION>
                            1998                          1997
                --------------------------------------------------------
                                   Dividend                       Dividend
                 High       Low      Rate      High       Low       Rate 
                ------     ------    ----     ------     ------    -----
<S>             <C>        <C>       <C>      <C>        <C>       <C>
1st Quarter     28 3/8     23 3/4     .10     24 1/8     20 1/2     .10
2nd Quarter     27 1/16    24 7/8     .10     27 5/16    20 1/8     .10
3rd Quarter     25 5/8     15 7/8     .10     28 5/8     25         .10
4th Quarter     21         15 9/16    .10     28 5/8     24 1/4     .10
For the Year    28 3/8     15 9/16    .40     28 5/8     20 1/8     .40
</TABLE>






12
<PAGE>   15









DESIGNED BY DANIEL THOMAS AND GODWINGROUP, JACKSON, MISSISSIPPI
PHOTOGRAPHY BY DAVID X. TEJEDA, DENVER, COLORADO
PRINTING BY HEDERMAN BROTHERS, RIDGELAND, MISSISSIPPI



                                                                              13
<PAGE>   16



CHEMFIRST INC.             POST OFFICE BOX 1249  JACKSON, MISSISSIPPI 39215-1249


14
<PAGE>   17
                             [LOGO] CHEMFIRST INC.

                             1998 FINANCIAL REVIEW



<PAGE>   18

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

        In June 1997, Statement of Financial Accounting Standards (SFAS) No.
131, Disclosures about Segments of an Enterprise and Related Information, was
issued, to be effective for fiscal years beginning after December 15, 1997. This
statement mandates a management approach, based on the way management organizes
businesses within a company for making operating decisions and assessing
performance, to provide selected reporting information. The following discussion
is based upon and should be read in conjunction with the selected historical
financial information and the Company's financial statements, including the
notes thereto, which reflect the adoption of this statement.

        1998 VERSUS 1997

        CONSOLIDATED RESULTS

        Income from continuing operations for 1998 was $24.7 million, down 35%
from the prior year. Results for 1998 include other income of $9.3 million ($5.7
million after tax), primarily related to the gain on the sale of the Company's
50% interest in Power Sources, Inc. (PSI) in the first quarter of 1998. Prior
year results include a $14.7 million gain ($8.8 million after tax) from the
fourth quarter sale of the Companys 23% interest in Melamine Chemicals, Inc.
(Melamine) and $2.5 million equity in net earnings of PSI and Melamine (see note
3 to the Consolidated Financial Statements). Excluding these gains and equity
earnings, earnings from continuing operations were $19.0 million, down 28% from
$26.5 million in 1997 primarily due to lower margins, increased research and
development and higher interest expense. Sales for the year were up 2%,
primarily due to higher aniline volume.

        SEGMENTS

        Electronic and Other Specialty Chemicals pretax operating profits for
1998 were $17.8 million on sales of $179.6 million. Sales of chemical mechanical
planarization and acylation derivatives products (used primarily in the
manufacture of integrated circuits) from acquisitions in December 1997, were
$14.9 million and pretax operating losses were $2.6 million. Pretax operating
profits and sales, excluding the above acquisitions, were down 26% and 8%,
respectively, due to lower demand for an agricultural chemical intermediate and
lower prices from many products due to competitive pressure. Remover product
sales volume was up 4% and average unit prices were unchanged despite an
estimated 4% decline in worldwide silicon consumption and a downturn in the
semiconductor industry.

        Polyurethane Chemicals pretax operating profits were $22.6 million, down
6% from the prior year. Operating profits declined in 1998 as lower production
and higher costs at the Pascagoula, Mississippi, facility and 17% lower average
nitrobenzene prices more than offset the additional production from the Baytown,
Texas, facility. Sales for the year were $125.5 million, up 6% as a 16% increase
in sales volume was partially offset by lower average sales prices. The
increased volume was due to the added production from the Companys new
250-million-pound-per-year aniline facility in Baytown, which began operations
in March 1998. The additional Baytown production was partially offset by reduced
aniline production at Pascagoula mostly due to production inefficiencies and
unscheduled plant maintenance in the first quarter and a scheduled plant
turnaround in the second quarter. Hurricane Georges struck the Pascagoula
facility on September 28, 1998, and shut down operations for 18 days. However,
the Companys insurance will cover most of the facility's repairs and lost 
profits incurred during that period.

        Unallocated corporate expenses for 1998 were $9.8 million, down 14% from
the prior year primarily due to a reduction in compensation expense indexed to
the Companys stock price. Net interest income was down $2.8 million due to $1.7
million in higher interest expense, net of capitalized interest, and $1.1
million in lower interest income. Capitalized interest for the year was up $0.8
million over the prior year. Interest expense was up on higher debt while
interest income declined as cash proceeds received in 1996 from the fertilizer
disposition were used for capital expenditures and share repurchases. Other
income and expense in 1998 included a $10.1 million gain on the sale of PSI and
a $0.8 million valuation allowance for a note received in the disposition of
Plasma Processing Corporation in January 1997. Other income for 1997 included
the $14.7 million gain on the sale of Melamine.




                                                                               1

<PAGE>   19
        1997 VERSUS 1996

        CONSOLIDATED RESULTS

        Income from continuing operations for 1997 was $37.8 million versus
$17.0 million for 1996. Results for 1997 include a $14.7 million ($8.8 million
after tax) gain from the sale of Melamine. Excluding this gain and equity
earnings, income from continuing operations for 1997 was $26.5 million, up 64%
from 1996 on a 21% increase in sales and lower interest expense. Interest
expense for 1997 was down $6.3 million from the prior year due to the
extinguishment of most debt of the company with the disposal of fertilizer
operations in December 1996 (see note 2 to the Consolidated Financial
Statements).

        SEGMENT OPERATIONS

        Electronic and Other Specialty Chemicals operating profits for 1997 were
$27.6 million, up 23% from 1996 as sales grew 19%. The increase in sales was due
to high utilization of capacity expansions completed in December 1996 and
increased nitrotoluene derivative sales volume.

        Polyurethane Chemicals pretax operating profits for 1997 were $24.1
million, up 14% from 1996 as sales increased 24% primarily due to higher sales
volumes. Nitrobenzene sales volume was up due to increased production following
modifications at the Pascagoula facility. Aniline sales volume was up 16%,
primarily due to the purchase of product for resale. However, these aniline
sales did not contribute significantly to operating results.

        Unallocated corporate expenses for 1997 were $11.3 million, down 15%
from 1996, which included $1.0 million in corporate expenses related to the
companys name change and restructuring in association with the disposition of
fertilizer operations. Net interest income was $3.0 million in 1997 versus a net
interest expense of $3.9 million in 1996, primarily due to the assumption of
debt by Mississippi Chemical Corporation related to the disposal of fertilizer
in December 1996 and higher interest income from the invested cash proceeds of
the transaction. Other income for 1997 included the $14.7 million gain on the
sale of Melamine.

        DISCONTINUED OPERATIONS

        In the fourth quarter of 1998, the Company's board of directors approved
a plan to dispose of Callidus Technology, Inc. (CTI). The plan assumes this
disposition will be finalized during 1999. CTIs net book amount at December 31,
1998, was $15.6 million. The disposal of CTI, which includes Plasma Energy
Corporation, will complete the disposition of the Engineered Products and
Services segment. The disposition of the other major portion of this segment,
Plasma Processing Corporation, was completed in January 1997.

        In the third quarter of 1998, the Company finalized plans to dispose of
its steel operations by the end of 1999. An anticipated loss on disposal of
$12.0 million, net of applicable income taxes of $6.0 million, was recorded at
September 30, 1998, and was primarily related to the writedown of assets to
their estimated net realizable value. As of December 31, 1998, the proceeds of
this disposal, including income tax benefit, are estimated to be approximately
$27.0 million. During the year, the U. S. steel industry was hurt by imports and
by a weak domestic market. This led to a sharp decline in steel orders and
margins. The Company believes these conditions have also negatively affected
disposition of the steel operations.

        On December 24, 1996, First Mississippi completed the spinoff of
ChemFirst Inc. and the combining of its fertilizer operations with Mississippi
Chemical Corporation. On October 20, 1995, the Company completed the spinoff of
its 81% owned subsidiary, Getchell Gold Corporation (Getchell), to shareholders.
In November 1998, Getchell and Placer Dome Inc. announced plans to merge.
Closing is anticipated in the second quarter of 1999 and, if consummated, will
result in the prepayment of approximately $29.3 million of principal and
interest due to the Company.




2
<PAGE>   20
        The historical results of the above businesses, the gain on disposal of
fertilizer operations and the estimated loss on disposal of steel operations,
are reflected in discontinued operations.

        Loss from discontinued operations for 1998 was $2.6 million versus
earnings of $1.1 million and $9.1 million in 1997 and 1996, respectively. The
loss in 1998 was primarily in steel operations. The earnings in 1996 included
$36.6 million in earnings from fertilizer operations, partially offset by $27.5
million in total losses in steel and engineered products and services
operations. Engineered products and services losses in 1996 were primarily due
to write-downs and accruals made in anticipation of the sale of aluminum
recovery operations. In 1998, the Company recorded a net loss from disposal of
steel operations of $12.0 million. The gain on disposal of businesses in 1996
includes $225.4 million in gain from the disposal of fertilizer operations, net
of $1.7 million in losses related to operations discontinued in prior years (see
notes 1 and 2 to the Consolidated Financial Statements for the details of these
transactions).

        ENVIRONMENTAL MATTERS

        The Company's operations are subject to a wide variety of constantly
changing environmental laws and regulations governing emissions to the air,
discharges to water sources, and the handling, storage, treatment and disposal
of waste materials, as well as other laws and regulations concerning health and
safety conditions for which it must incur certain costs. The Companys capital
expenditures for environmental protection were $0.2 million in 1998. Capital
expenditures are projected to be $1.4 million and $1.1 million for 1999 and
2000, respectively. In addition, the Company accrues for anticipated costs
associated with investigatory and remediation efforts relating to the
environment. At December 31, 1998, the Companys accrued liability for these
matters totaled $1.6 million, $1.4 million of which is for discontinued
operations and $0.2 million for continuing operations. Based on information
presently available, the Company believes any amounts paid in excess of the
accrued liabilities will not have a material adverse effect on its financial
position, cash flows or results of operations.

        In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position 96-1, Environmental Remediation Liabilities. This
statement provides guidance in applying existing accounting literature to
calculating, recording and disclosing environmental remediation liabilities. The
adoption of this standard did not have a material effect on the Company's 1997
or 1998 financial statements.

        CAPITAL RESOURCES AND LIQUIDITY

        Net cash provided by operations was $34.2 million, up $10.6 million from
1997. Net cash provided by operating activities in 1997 was lower, primarily due
to the reduction of accruals made in 1996 related to the fertilizer disposition.
Investing activities for the year included pretax proceeds of $19.0 million from
the sale of PSI and $43.8 million in capital expenditures. Capital expenditures
were down versus 1997 when the bulk of expenditures for the new aniline facility
in Baytown and expenditures for specialty chemical expansions in Pascagoula were
made. Financing activities for 1998 included $42.6 million for the repurchase of
Company stock and $46.4 million in net borrowings.

        Projected capital expenditures for 1999 are approximately $30.0 million.
Also, the Company has approximately $48.0 million remaining in its current stock
repurchase plan. The Company believes that its cash flow from operations,
combined with access to its existing or additional bank credit facilities,
adequately provide for the Companys cash requirements. Additional anticipated
sources of cash include proceeds related to discontinued operations, including
the disposal of its steel operations and CTI, plus collection of a note due from
Getchell (see Discontinued Operations).






                                                                               3
<PAGE>   21
        RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

        In March 1998, the Accounting Standards Executive Committee (AcSEC)
released Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. The SOP identifies the
characteristics of internal-use software and provides guidance for accounting
treatment of costs for computer software developed or obtained for internal use
as related to capitalization or expense decisions. The statement is effective
for fiscal years beginning after December 15, 1998. In April 1998, AcSEC
released SOP 98-5, Reporting on the Costs of Start-Up Activities. The SOP
broadly defines start-up activities and provides guidance on the financial
reporting of start-up costs and organization costs. It requires costs of
start-up activities and organization costs to be expensed as incurred. The
statement is effective for fiscal years beginning after December 15, 1998.
Adoption of these statements is not expected to have a material impact on the
Companys financial statements.

        SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued in June 1998, effective for fiscal years beginning after
June 15, 1999. The statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. All derivatives are required
to be recognized as either assets or liabilities in the statement of financial
position and measured at fair value. Changes in fair value will be reported
either in earnings or outside earnings depending on the intended use of the
derivative and the resulting designation. Entities applying hedge accounting are
required to establish at the inception of the hedge the method used to assess
the effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. The Company currently follows
SFAS No. 52, Foreign Currency Translation, and applies hedge accounting
treatment to certain foreign currency transactions by entering into forward
exchange contracts. Gains and losses associated with currency rate changes on
forward contracts hedging foreign currency transactions are recorded in income
and generally offset the transaction losses or gains on the foreign currency
cash flows that they are intended to hedge. Gains and losses on contracts
hedging firm sales commitments are deferred until the related transactions are
consummated. The Company has not completed its analysis of SFAS No. 133 and,
accordingly, has not determined what effect, if any, it may have on future
operations and financial statement disclosure.

        MARKET RISK

        The Company is exposed to changes in financial market conditions in the
normal course of its business, including changes in interest rates and foreign
currency exchange rates. At December 31, 1998, the Companys derivative and other
financial instruments included long-term debt denominated in U.S. dollars and
short-term debt denominated in Japanese yen and a series of short-term forward
sales of Japanese yen. Due to the short-term nature and size of these yen
obligations, the Company does not consider its exposure to foreign currency or
interest rate fluctuations on these instruments to be material.

        The Company utilizes fixed and variable-rate debt to maintain liquidity
and fund its business operations, with the terms and amounts based on business
requirements, market conditions and other factors. At December 31, 1998, the
market value of the Company's fixed rate borrowings was approximately $24.0
million. A 100 basis point change in interest rates (all other variables held
constant) as of December 31, 1998, would result in a $1.0 million change in fair
market value, but would not affect interest expense or cash flow. At December
31, 1998, the Company had $41.0 million in variable-rate debt. A 100 basis point
change in interest rates (all other variables held constant) on this portion of
the Company's debt, would result in a change in interest expense of
approximately $0.4 million.

        YEAR 2000

        The advent of the Year 2000 poses significant risks to many companies
because of calculation limitations imposed by some equipment and systems limited
to storing a year as a two-digit field (e.g., 1998 as 98), which may lead to
computational errors when the years 2000 or later are used in calculations. In
1996, the Company began a study which led to the purchase in 1997 of a
company-wide Enterprise Resource Planning (ERP) system to integrate the
Company's information systems, replacing small, stand-alone purchased systems.




4

<PAGE>   22
        The ERP system will be Year 2000 compliant, with the material portion of
the system planned for completion by the middle of 1999. Installation is being
completed in stages, with the first sites converted at December 31, 1998. To
date, the Company has spent $8.9 million on this project and is projecting to
spend approximately $2.0 million in 1999. If difficulties are encountered that
delay the ERP system implementation, contingency plans provide for the purchase
of select, Year 2000 compliant personal computer software products, the cost of
which should not be material.

        A corporate-wide survey of other information technology (IT) and non-IT
equipment and systems utilizing date or time functions has been undertaken. The
current estimated cost to remediate is less than $0.6 million, most of which
will be incurred in 1999. Remediation, including verification testing of most
non-compliant systems, equipment and software is targeted for completion by
April 30, 1999. Some remediations at the Pascagoula facility, however, will
occur in the fourth quarter of 1999 to coincide with the next scheduled plant
maintenance turnaround. Contingency plans are currently being developed in the
event the remediations do not occur or are delayed. Severe delay or widespread
failure affecting both the remediation effort and the contingency plans,
although not expected, could have a material effect on the Company's financial
condition and results of operations.

        Key customers, as well as service and raw material suppliers, are being
surveyed about their Year 2000 readiness. Depending on their responses,
contingency plans will be developed as appropriate. It is anticipated that this
process will be completed no later than September 30, 1999. Although the Company
cannot quantify the precise effect, significant or prolonged disruptions of key
customers or suppliers could have a material effect on the Companys financial
condition and results of operations. For example, the majority of aniline
produced by the Company is sold through long-term contracts to a few customers.
Their inability to utilize the Company's aniline could have a material adverse
effect.

        FORWARD-LOOKING STATEMENTS

        Certain statements included in this Managements Discussion and Analysis
of Financial Condition and Results of Operations that relate to the Year 2000,
proceeds from the discontinuance of steel and engineered products and services
operations, the prepayment of a note by Getchell and insurance recoveries
related to recent hurricane damage, as well as other statements in this Annual
Report that are not historical in nature, may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements, as well as other forward-looking
statements made from time to time by the Company or in the Company's press
releases and filings with the U.S. Securities and Exchange Commission, are based
on certain underlying assumptions and expectations of management.

        These forward-looking statements are subject to risks and uncertainties
which could cause actual results to differ materially from those expressed in
such forward-looking statements. Such risks and uncertainties include, but are
not limited to, general economic conditions, availability and pricing of raw
materials, supply/demand balance for key products, new product development,
manufacturing efficiencies, conditions of and product demand by key customers,
the timely completion and start up of construction projects, pricing pressure as
a result of the downturn in markets, successful installation of the Company's
new ERP system, the inability of the Company to either resolve the Companys Year
2000 issues or to accurately estimate the costs associated with Year 2000
compliance, the resolution of contingencies related to the sale of PSI,
insurance coverage related to hurricane damage to the Company's Pascagoula
facility and other factors as may be discussed in the Company's Form 10-K for
the fiscal year ended December 31, 1998.




                                                                               5
<PAGE>   23
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                (In Thousands of Dollars)
                                                                                                     December 31,    
                                                                                              ------------------------
                                                                                                1998           1997
                                                                                              ---------      ---------
<S>                                                                                           <C>                <C>  
Assets
Current assets:
        Cash and cash equivalents                                                             $  11,226          7,766
        Receivables:
                Trade, less allowance for doubtful accounts of $317 and $97, respectively        40,646         48,694
                Affiliated companies                                                                 --            303
                Other                                                                             3,152          4,065
                                                                                              ---------      ---------

                        Total receivables                                                        43,798         53,062
                                                                                              ---------      ---------

        Inventories:
                Finished products                                                                32,872         22,234
                Work in process                                                                   7,045          6,880
                Raw materials and supplies                                                       11,378         10,139
                                                                                              ---------      ---------
                        Total inventories                                                        51,295         39,253
                                                                                              ---------      ---------
        Prepaid expenses and other current assets                                                 8,274          7,640
        Net current assets of discontinued operations                                            46,309         39,445
                                                                                              ---------      ---------
                        Total current assets                                                    160,902        147,166
                                                                                              ---------      ---------
Investments and other assets:
        Investments in affiliated companies                                                          --          7,138
        Other investments                                                                        32,769         31,573
        Intangible and other assets, at cost less amortization                                   16,362         17,918
                                                                                              ---------      ---------
                        Total investments and other assets                                       49,131         56,629
                                                                                              ---------      ---------

Property, plant and equipment, net                                                              227,401        204,577
                                                                                              ---------      ---------

Noncurrent assets of discontinued operations                                                      6,000         24,725
                                                                                              ---------      ---------
                                                                                              $ 443,434        433,097
                                                                                              =========      =========



Liabilities and Stockholders Equity
Current liabilities:
        Notes payable                                                                         $   5,354         20,700
        Current installments of long-term debt                                                      251            277
        Deferred revenue                                                                            104             56
        Accounts payable - trade (including book overdrafts of
                $6,673 and $10,793, respectively)                                                22,020         29,911
        Accrued expenses and other current liabilities                                           16,237         16,286
                                                                                              ---------      ---------
                        Total current liabilities                                                43,966         67,230
                                                                                              ---------      ---------
Long-term debt, excluding current installments                                                   64,956          3,941
Other long-term liabilities                                                                      24,783         19,562
Noncurrent liabilities of discontinued operations                                                10,097         10,537
Deferred income taxes                                                                            13,501         10,130
Minority interest                                                                                   649             --
Stockholders equity:
        Serial preferred stock. Authorized 20,000,000 shares; none issued
        Common stock of $1 par value. Authorized 100,000,000 shares;
                outstanding 18,445,391 and 20,030,939 shares, respectively                       18,445         20,031
Additional paid-in capital                                                                       22,212         18,869
Accumulated other comprehensive income                                                             (293)            --
Retained earnings                                                                               245,118        282,797
                                                                                              ---------      ---------
                        Total stockholders equity                                               285,482        321,697
                                                                                              ---------      ---------
                                                                                              $ 443,434        433,097
                                                                                              =========      =========
</TABLE>


See accompanying notes to consolidated financial statements.



6
<PAGE>   24
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                       (In Thousands of Dollars,
                                                                       Except Per Share Amounts)
                                                                        Years ended December 31,
                                                                 --------------------------------------
                                                                   1998           1997          1996
                                                                 ---------      ---------     ---------
<S>                                                              <C>              <C>           <C>    
Revenues:
        Sales                                                    $ 305,104        297,822       246,012
        Interest and other income, net                              16,436         22,130         5,015
                                                                 ---------      ---------     ---------
                                                                   321,540        319,952       251,027
                                                                 ---------      ---------     ---------
Costs and expenses:
        Cost of sales                                              228,916        217,386       174,857
        General, selling and administrative expenses                40,077         38,362        37,268
        Other operating expenses                                    10,461          5,573         5,721
        Interest expense                                             1,986            283         6,579
                                                                 ---------      ---------     ---------
                                                                   281,440        261,604       224,425
                                                                 ---------      ---------     ---------
Earnings from continuing operations before
        income taxes and investee earnings                          40,100         58,348        26,602
Income tax expense                                                  15,440         23,050        10,471
Equity in net earnings of affiliated companies                          --          2,497           846
                                                                 ---------      ---------     ---------
Earnings from continuing operations                                 24,660         37,795        16,977
Earnings (loss) from discontinued operations, net of taxes          (2,618)         1,103         9,144
Net gain (loss) on disposal of businesses, net of taxes            (11,950)            --       223,739
                                                                 ---------      ---------     ---------
                        Net earnings                             $  10,092         38,898       249,860
                                                                 =========      =========     =========

Earnings (loss) per common share :
        Earnings (loss) per common share:
        Continuing operations                                    $    1.28           1.85           .83
        Discontinued operations                                       (.14)           .06           .44
        Net gain (loss) on disposal of businesses                     (.62)            --         10.85
                                                                 ---------      ---------     ---------
                        Net earnings                             $     .52           1.91         12.12
                                                                 =========      =========     =========
        Earnings (loss) per common share, assuming dilution:
        Continuing operations                                    $    1.27           1.81           .81
        Discontinued operations                                       (.14)           .05           .44
        Net gain (loss) on disposal of businesses                     (.61)            --         10.70
                                                                 ---------      ---------     ---------
                        Net earnings                             $     .52           1.86         11.95
                                                                 =========      =========     =========
</TABLE>




See accompanying notes to consolidated financial statements.



                                                                               7

<PAGE>   25
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                    (In Thousands of Dollars, Except Share Amounts)
                                                                     Years ended December 31, 1998, 1997 and 1996
                                                  --------------------------------------------------------------------------------
                                                                                                       Accumulated 
                                                           Common Stock               Additional          Other
                                                  ------------------------------       Paid-In        Comprehensive      Retained
                                                     Shares            Amount          Capital            Income         Earnings
                                                  ------------      ------------     -------------     ------------     ----------
<S>                                               <C>               <C>              <C>               <C>              <C>
Balance, December 31, 1995                          20,584,991      $     20,585            14,202               --        191,972
Net earnings                                                --                --                --               --        249,860
Dividends declared - $.40 per share                         --                --                --               --         (8,246)
Distribution of common stock of
        Mississippi Chemical Corp.                          --                --                --               --       (162,346)
Common stock issued:
        Employee stock options                          41,704                42               768               --             --
        Convertible debentures                          46,583                47               308               --             --
Purchase and retirement of
        common shares                                     (500)               (1)               --               --            (13)
Income tax benefit on exercise of stock
        options and convertible debentures                  --                --             1,308               --             --
                                                  ------------      ------------     -------------     ------------     ----------
Balance, December 31, 1996                          20,672,778            20,673            16,586               --        271,227
Net earnings                                                --                --                --               --         38,898
Dividends declared - $.40 per share                         --                --                --               --         (8,147)
Common stock issued:
        Employee stock options                          65,620                66               881               --             --
        Convertible debentures                          93,317                93               516               --             --
Purchase and retirement of
        common shares                                 (800,776)             (801)               --               --        (19,181)
Income tax benefit on exercise of stock
        options and convertible debentures                  --                --               886               --             --
                                                  ------------      ------------     -------------     ------------     ----------
Balance, December 31, 1997                          20,030,939            20,031            18,869               --        282,797
Net earnings                                                --                --                --               --         10,092
Dividends declared - $.40 per share                         --                --                --               --         (7,659)
Common stock issued:
        Employee stock options                          43,102                43               724               --             --
        Convertible debentures                         148,930               149             1,008               --             --
        Employee Stock Purchase Plan                    51,417                51               933               --             --
Purchase and retirement of
        common shares                               (1,828,997)           (1,829)               --               --        (40,112)
Income tax benefit on exercise of stock
        options and convertible debentures                  --                --               678               --             --
Foreign currency translation adjustments                    --                --                --             (293)            --
                                                  ------------      ------------     -------------     ------------     ----------
Balance, December 31, 1998                          18,445,391      $     18,445            22,212             (293)       245,118
                                                  =============     ============     =============                      ==========
Total comprehensive income:
Net earnings for year ended December 31, 1998                                                                10,092
                                                                                                       ------------
Total comprehensive income                                                                             $      9,799
                                                                                                       ============
</TABLE>


See accompanying notes to consolidated financial statements 



8
<PAGE>   26

        CONSOLIDATED STATEMENTS OF CASH FLOWS   

<TABLE>
<CAPTION>
                                                                                   (In Thousands of Dollars)
                                                                                   Years ended December 31,
                                                                         ------------------------------------------
                                                                            1998            1997            1996
                                                                         ----------      ----------      ----------
<S>                                                                      <C>             <C>             <C>    
Cash flows from operating activities:
   Net earnings                                                          $   10,092          38,898         249,860
   Adjustments to reconcile net earnings to net cash provided
     by operating activities:
       Depreciation and amortization                                         23,688          17,254          13,669
       Provision for losses on receivables                                      203             505             364
       Deferred income taxes                                                  3,057          (1,254)           (575)
       Net (gain) loss on disposal of businesses, net of tax benefit         11,950              --        (223,739)
       Gain on sale of equity investees                                     (10,069)        (14,684)             -- 
       Undistributed earnings of affiliates, net of taxes                        --          (2,497)           (846)
       Changes in current assets and liabilities, net of effects of
        acquisitions and dispositions:
          Receivables                                                        15,237         (11,365)           (397)
          Inventories                                                       (12,481)         (2,184)         (1,940)
          Prepaid expenses                                                     (320)          2,291              27
          Accounts payable                                                   (7,943)          4,275          (1,334)
          Accrued expenses and other current liabilities                      1,588          (8,826)          7,279
       Deferred revenue                                                       3,301           3,296           2,788
       Other, net                                                              (800)         (2,034)         (1,273)
       Net (earnings) loss from discontinued operations                       2,618          (1,103)         (9,144)
                                                                         ----------      ----------      ----------
   Net cash provided by continuing operations                                40,121          22,572          34,739
   Net cash provided by (used in) discontinued operations                    (5,970)            965          46,162
                                                                         ----------      ----------      ----------
          Net cash provided by operating activities                          34,151          23,537          80,901
                                                                         ----------      ----------      ----------
Cash flows from investing activities:
   Capital expenditures                                                     (43,786)        (91,442)        (48,889)
   Acquisitions of businesses                                                    --         (11,166)             --
   Proceeds from sale of businesses                                              --           2,100         142,665
   Proceeds from sale of property, plant and equipment                          371           1,222            (100)
   Proceeds from sale of equity investees                                    18,986          26,138              --
   Other investing                                                              365            (216)            243
                                                                         ----------      ----------      ----------
   Net cash provided by (used in) investing activities of
       continuing operations                                                (24,064)        (73,364)         93,919
   Net cash used in investing activities of discontinued operations          (3,204)         (4,041)        (48,547)
                                                                         ----------      ----------      ----------
           Net cash provided by (used in) investing activities              (27,268)        (77,405)         45,372
                                                                         ----------      ----------      ----------
Cash flows from financing activities:
   Net borrowings on notes payable                                           46,354          20,000          11,000
   Principal repayments of long-term debt                                       (22)            (22)       (105,170)
   Repayments of other notes payable                                           (700)             --              --
   Dividends                                                                 (7,659)         (8,147)         (8,246)
   Purchase of common stock                                                 (42,617)        (19,312)            (12)
   Proceeds from issuance of common stock                                     1,669           1,475             914
                                                                         ----------      ----------      ----------
   Net cash used in financing activities, continuing operations              (2,975)         (6,006)       (101,514)
   Net cash used in financing activities, discontinued operations              (441)           (745)         (1,122)
                                                                         ----------      ----------      ----------
   Net cash used in financing activities                                     (3,416)         (6,751)       (102,636)
                                                                         ----------      ----------      ----------
Effect of exchange rate changes on cash                                          (7)             --              --
                                                                         ----------      ----------      ----------
Net increase (decrease) in cash and cash equivalents                          3,460         (60,619)         23,637
Cash and cash equivalents at beginning of year                                7,766          68,385          44,748
                                                                         ----------      ----------      ----------
Cash and cash equivalents at end of year                                 $   11,226           7,766          68,385
                                                                         ==========      ==========      ==========
Supplemental disclosures of cash flow information:
   Cash paid during the year for:
     Interest, net of amounts capitalized                                $    1,814             288           7,214
                                                                         ==========      ==========      ==========
     Income taxes, net                                                   $    7,283          20,832          11,132
                                                                         ==========      ==========      ==========
</TABLE>



Material noncash investing and financing activities are disclosed in notes 2 and
6.

See accompanying notes to consolidated financial statements.



                                                                               9

<PAGE>   27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1998, 1997 AND 1996

(In thousands of dollars, except share data; disclosures included in the Notes
to Consolidated Financial Statements relate to continuing operations, unless
otherwise indicated.)

1.      BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        CHANGE IN ORGANIZATION

        ChemFirst Inc. (the Company) was incorporated in Mississippi in 1983
under the name, Omnirad, Inc., as a wholly owned subsidiary of First Mississippi
Corporation (First Mississippi). In November 1996, in anticipation of the
Distribution (as described below), the Companys name was changed from Omnirad,
Inc. to ChemFirst Inc.

        Prior to December 23, 1996, the Companys subsidiaries were subsidiaries
of First Mississippi and the Companys operations were conducted through
subsidiaries of First Mississippi. On December 23, 1996 (the Distribution Date),
First Mississippi contributed all of its assets and subsidiaries, other than
those relating to its fertilizer business, to the Company, which at that time
was a wholly owned subsidiary of First Mississippi and had engaged in no
operating activities during the previous five years. First Mississippi then spun
off the Company in a tax-free distribution of the Companys common stock to First
Mississippi shareholders (the Distribution) on the Distribution Date. The
Distribution occurred immediately prior to and in connection with the merger of
First Mississippi with a wholly owned subsidiary of Mississippi Chemical
Corporation (MCC), pursuant to an Agreement and Plan of Merger and
Reorganization dated as of August 27, 1996 (the Merger). The Company has
operated as a publicly held entity since the Distribution Date. For financial
reporting purposes, this transaction has been accounted for as a disposal of the
fertilizer business. Accordingly, the Companys financial statements prior to the
Distribution are the historical financial statements of First Mississippi
restated to present the fertilizer business as a discontinued operation. For
further information, see note 2.

        BASIS OF PRESENTATION

        The principal businesses of the Company involve the production of
electronic and other specialty chemicals for use in the semiconductor industry
and in agricultural, pharmaceutical, polymer, photographic and photosensitive
applications, as well as the production of polyurethane chemicals. Further
descriptions of the Companys products and the relative significance of its
operations are included in the segment information data in note 12.

        The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Material
estimates that are susceptible to significant change in the near term relate to
the estimated losses and timing of discontinuation and disposal of businesses.

        PRINCIPLES OF CONSOLIDATION

        The consolidated financial statements include the accounts of the
Company and its subsidiaries. Intercompany balances and transactions have been
eliminated in consolidation. Investments in equity investments are accounted for
by the equity method.

        RECOGNITION OF REVENUE

        Revenues generally are recorded when title and risk of ownership pass
except for long-term construction-type contracts of certain discontinued
operations, which are accounted for under the percentage of completion method.

        INVENTORIES

        Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out and weighted average methods.



10
<PAGE>   28
        INTANGIBLE ASSETS

        Intangible assets are reviewed for impairment when the facts and
circumstances indicate that the carrying amount may not be recoverable.

        DEPRECIATION AND AMORTIZATION

        Depreciation of plant and equipment and depreciable investments is based
on cost and the estimated useful lives of the separate units of property. The
straight-line method is used in determining the amount of depreciation charged
to expense. Goodwill of businesses acquired is generally amortized up to 20
years using the straight-line method. Other intangibles are amortized over their
estimated useful lives (5-17 years) using the straight-line method.

        Loan costs are amortized over the terms of related loans using the
interest method.

        PENSION PLANS

        Pension cost is determined using the projected unit credit actuarial
method for financial reporting purposes. The Companys funding policy is to
contribute annually at amounts not less than the minimum requirements of the
Employee Retirement Income Security Act of 1974.

        INCENTIVE COMPENSATION

        All outstanding stock options are nonqualified and require no charges to
expense upon grant or exercise. The tax benefit the Company receives from
dispositions that result in ordinary income to option recipients is included in
stockholders equity.

        Phantom share units require no charge to expense upon grant or
redemption except that compensation plan discounts are amortized to expense over
various holding periods of up to three years. The share units are credited with
equivalent dividends equal to cash dividends paid by the Company. Equivalent
dividends are expensed through the statement of operations.

        CASH AND CASH EQUIVALENTS

        The Company considers all short-term investments with original
maturities of three months or less to be cash equivalents.

        INVESTMENTS

        Realized gains and losses on investments are determined on the basis of
specific costs.

        CONTINGENCIES

        Estimates of loss contingencies, including environmental liability costs
for remediation, are charged to expense when it is probable an asset has been
impaired or a liability incurred and the amount can be reasonably estimated. If
a potentially material loss contingency is reasonably possible, or probable but
cannot be estimated, then the nature of the contingency and an estimated range
of possible loss, if determinable and material, are disclosed.

        FOREIGN CURRENCY TRANSLATION

        Financial statements of foreign subsidiaries are translated into U.S.
dollars at current rates, except that revenues, costs and expenses are
translated at average current rates during each reporting period. Net exchange
gains or losses resulting from the translation of foreign financial statements
and the effect of exchange rate changes on intercompany transactions of a
long-term investment nature are accumulated in other comprehensive income.




                                                                              11

<PAGE>   29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

        DERIVATIVE FINANCIAL INSTRUMENTS        

        The Company uses forward exchange contracts to hedge certain foreign
receivables and firm sales commitments to be denominated in currencies other
than the functional currency of the entity involved. The contracts are
designated and effective as hedges. Gains and losses on contracts that hedge
recorded receivables activity offset the exchange rate fluctuations of the
underlying hedged transaction. Accounting for gains and losses on contracts
designated as hedges of identifiable foreign currency sales commitments involves
deferring recognition until the related transactions are consummated. When
consummated, these gains and losses are recorded in net income (see note 15).

        ACCOUNTING CHANGES

        Statement of Financial Accounting Standards (SFAS) No. 121, Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of,
was adopted by the Company in 1996 with no material effect to the Company.

        SFAS No. 123, Accounting for Stock-Based Compensation, was adopted by
the Company in 1996. In accounting for employee stock options and similar equity
instruments, companies are given the choice of either recognizing related
compensation cost by adopting the fair value method, or to continue using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25
(APB No. 25), Accounting for Stock Issued to Employees, and supplementally
disclose the proforma effect on earnings and earnings per share using SFAS No.
123 measurement criteria. The Company elected to continue to follow the
requirements of APB No. 25, and accordingly, there is no effect on the results
of operations.

        SFAS No. 128, Earnings per Share, was adopted by the Company in 1997.
This Statements objective is to simplify and standardize, relative to other
countries, the computation of earnings per share (EPS) previously required by
APB Opinion No. 15, Earnings per Share. It requires dual presentation of basic
and diluted EPS on the face of the income statement and a reconciliation of
basic and diluted EPS for continuing operations. Adoption of this Statement did
not have a material effect on the Companys EPS.

        SFAS No. 129, Disclosure of Information about Capital Structure, was
adopted by the Company in 1997 relative to descriptive disclosure of securities
outstanding. The Companys disclosure requirements are unchanged from previous
requirements.

        SFAS No. 130, Reporting Comprehensive Income, was adopted by the Company
in 1998. Its objective is to report all changes in equity during a period except
those resulting from investments by owners and distributions to owners. The
Company has presented comprehensive income detail in the consolidated statements
of stockholders equity.

        SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, was adopted by the Company in 1998. Its objective is to report
segment information based on the way management organizes the segments within
the enterprise for making operating decisions and assessing performance. Segment
information has been presented on this basis.

        SFAS No. 132, Employers Disclosures about Pensions and Other
Postretirement Benefits, was adopted by the Company in 1998. The purpose of this
statement is to provide additional insight into benefit obligation and plan
asset changes.




12
<PAGE>   30
        FUTURE IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

        SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued in June 1998, effective for fiscal years beginning after
June 15, 1999. The statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. All derivatives are required
to be recognized as either assets or liabilities in the statement of financial
position and measured at fair value. Changes in fair value will be reported
either in earnings or outside earnings depending on the intended use of the
derivative and the resulting designation. Entities applying hedge accounting are
required to establish at the inception of the hedge the method used to assess
the effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. The Company currently follows
SFAS No. 52, Foreign Currency Translation, and applies hedge accounting
treatment to certain foreign currency transactions by entering into forward
exchange contracts. Gains and losses associated with currency rate changes on
forward contracts hedging foreign currency transactions are recorded in income
and generally offset the transaction losses or gains on the foreign currency
cash flows that they are intended to hedge. Gains and losses on contracts
hedging firm sales commitments are deferred until the related transactions are
consummated. The Company has not completed its analysis of SFAS No. 133 and,
accordingly, has not determined what effect, if any, it may have on future
operations and financial statement disclosure.

2.      ACQUISITIONS AND DISPOSALS

        ACQUISITIONS

        On December 31, 1997, the Company acquired from Clariant Corporation an
acylation derivatives business involved in the development and marketing of
photoresist applications, as well as the chemical mechanical planarization
assets of Baikowski International Corporation and Moyco Technologies, Inc. The
aggregate purchase price of these three businesses was approximately $14,900,
including approximately $11,200 in cash and contingent consideration of
approximately $3,700 (approximately $5,000 face value before discounting),
payable in five years. Goodwill is amortized on a straight-line basis over the
period assigned to each acquisition, ranging from five to 15 years.

        DISPOSALS

        In the fourth quarter of 1998, the Companys board of directors approved
a plan to dispose of Callidus Technology, Inc. (CTI). The plan assumes this
disposition will be finalized during 1999. The assets and liabilities of CTI
have been classified, net, as current discontinued assets of $9,600 and
non-current discontinued assets of $6,000. With this disposal, the Company will
complete the disposition of its Engineered Products and Services segment. The
disposition of the other major portion of this segment, Plasma Processing
Corporation was completed in January 1997 with a sale for $4,100, generating no
gain or loss on disposal. The Company recorded pretax charges of $20,402,
($18,256 and $2,146 during the second and fourth quarters of 1996, respectively)
in anticipation of the sale. These charges included $13,941 in asset writedowns
and $6,461 in accruals, consisting of $4,146 in estimated costs in excess of
market value to process inventory to meet contractual obligations, $500 for
disposal of marketable inventory, $525 for severance and $1,290 for contract
cancellations and other estimated costs. In December 1998, an additional accrual
of $1,465 was made to dispose of unprocessed inventory. In 1998 and prior years,
the Company expended $888 and $5,598, respectively, in cash against these
accruals, primarily related to inventory processing and severance payments,
leaving an accrual balance of $1,440.

        In the third quarter of 1998, the Companys board of directors approved a
plan to discontinue its steel operations through a disposal of the assets of
FirstMiss Steel, Inc. by September 1999 and accordingly, the assets and
liabilities, net, have been classified as current. The carrying amount of these
assets was written down by $14,872 in the third quarter of 1998 to estimated net
realizable amount. In addition, accruals of $3,128 were recorded for estimated
costs of exiting this business. The carrying amount of the Steel net assets was
$26,565 at December 31, 1998. A previous writedown of $10,125 was taken in 1996.





                                                                              13
<PAGE>   31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

        As discussed in note 1, on December 23, 1996, First Mississippi
completed the spinoff of the Company and on December 24, 1996, First Mississippi
and its fertilizer operations (Fertilizer) were merged with a wholly owned
subsidiary of MCC. Prior to the completion of the transaction, First Mississippi
borrowed $150,500, which was used to refinance First Mississippis existing
indebtedness and pay certain transaction costs. This debt remained the
obligation of First Mississippi, which became a subsidiary of MCC as a result of
the Merger. As part of the transaction, for each share of First Mississippi
common stock outstanding at the close of trading on December 23, 1996, First
Mississippi shareholders received one share of ChemFirst Inc. common stock and
approximately one-third share of MCC common stock. The total value of the
transaction was approximately $312,500, based on the value of the assumed
indebtedness of $150,500 and the value, approximately $162,000, of the shares of
MCC distributed to First Mississippi shareholders. These total proceeds, less
the net book value of the Fertilizer assets and related transaction costs,
resulted in a pretax gain of approximately $222,000 and an after tax gain of
approximately $225,000. The gain on disposition of the Fertilizer assets is
included in gain on disposal of businesses in the December 31, 1996,
consolidated statements of operations. The tax benefit from the transaction was
for certain tax deductible expenses incurred by the Company. The distribution of
MCC shares to First Mississippi shareholders is reported as a reduction of
stockholders equity in the accompanying December 31, 1996, financial statements.

        A pretax loss of $2,700 was also recorded during the year ended December
31, 1996, related to other previously discontinued businesses and is included in
gain on disposal of businesses, net of applicable income tax benefit of $954, in
the consolidated statements of operations. Such loss resulted from revised
estimates of environmental remediation costs and settlements of operating costs
related to previously discontinued phosphate fertilizer (1982) and oil and gas
(1993) businesses.

        The net assets and liabilities of discontinued operations included in
the consolidated financial statements are classified as current assets,
noncurrent assets and noncurrent liabilities by segment as follows:

<TABLE>
<CAPTION>
                                                                           Engineered Products
                                                    Steel                 and Services and Other                    Total
                                         ------------------------------------------------------------------------------------------
                                                 December 31,                   December 31,                      December 31,
                                         --------------------------      --------------------------      --------------------------
                                            1998            1997            1998            1997            1998            1997
                                         ----------      ----------      ----------      ----------      ----------      ----------
<S>                                      <C>             <C>             <C>             <C>             <C>             <C>   
Current assets                           $   24,766          39,186          33,172          30,426          57,938          69,612
Investments and other assets                     --              --             359              --             359              --
Property, plant and equipment, net            9,300              --           8,489              --          17,789              --
Current liabilities                          (7,036)        (13,705)        (22,276)        (16,462)        (29,312)        (30,167)
Long-term debt, excluding
  current installments                         (465)             --              --              --            (465)             --
                                         ----------      ----------      ----------      ----------      ----------      ----------
Net current assets of
  discontinued operations $                  26,565          25,481          19,744          13,964          46,309          39,445
                                         ==========      ==========      ==========      ==========      ==========      ==========

Investments and other assets             $       --             500           6,000             326           6,000             826
Property, plant and equipment, net               --          16,894              --           7,005              --          23,899
                                         ----------      ----------      ----------      ----------      ----------      ----------
Noncurrent assets of discontinued
  operations                             $       --          17,394           6,000           7,331           6,000          24,725
                                         ==========      ==========      ==========      ==========      ==========      ==========


Long-term debt, excluding
  current installments                   $       --             924              --              --              --             924
Deferred income taxes and other, net             --              --          10,097           9,613          10,097           9,613
                                         ----------      ----------      ----------      ----------      ----------      ----------
Noncurrent liabilities of
  discontinued operations                $       --             924          10,097           9,613          10,097          10,537
                                         ==========      ==========      ==========      ==========      ==========      ==========
</TABLE>




14
<PAGE>   32

        The statements of operations have been reclassified to separate
discontinued and continuing operations. Revenues and net earnings (losses) of
the discontinued operations, by segment, for the years ended December 31, 1998,
1997 and 1996 were as follows:

<TABLE>
<CAPTION>
                                                                           December 31, 
                                                              ------------------------------------
                                                                1998          1997          1996
                                                              --------      --------      --------
<S>                                                           <C>           <C>            <C>    
Fertilizer
  Sales and revenues                                          $     --            --       231,195
                                                              ========      ========      ========
  Earnings from operations before taxes                             --            --        57,725
  Income tax expense                                                --            --        21,356
  Equity in net earnings of equity investees                        --            --           193
                                                              --------      --------      --------
  Earnings from discontinued operations, net                  $     --            --        36,562
                                                              ========      ========      ========
Steel
  Sales and revenues                                          $ 54,620        75,304        73,750
                                                              ========      ========      ========
  Loss from operations before taxes                             (1,499)       (1,134)      (11,596)
  Income tax benefit                                              (585)         (444)       (4,291)
                                                              --------      --------      --------
  Loss from discontinued operations, net                      $   (914)         (690)       (7,305)
                                                              ========      ========      ========
Engineered Products and Services and Other
  Sales and revenues                                          $ 68,011        72,798        65,431
                                                              ========      ========      ========
  Earnings (loss) from operations before taxes                  (2,705)        2,952       (31,926)
  Income tax expense (benefit)                                  (1,001)        1,159       (11,813)
                                                              --------      --------      --------
  Earnings (loss) from discontinued operations, net           $ (1,704)        1,793       (20,113)
                                                              ========      ========      ========
       Total operating results of discontinued operations     $ (2,618)        1,103         9,144
                                                              ========      ========      ========
</TABLE>


        Earnings (loss) from operations of discontinued businesses included
interest expense allocations (based on the ratio of net assets of discontinued
operations to consolidated net assets plus debt) of $309, $41 and $1,086 in
1998, 1997 and 1996, respectively.

3.      INVESTMENTS

        On January 22, 1998, the Company sold its 50% interest in Power Sources,
Inc. (PSI) to Trigen Energy Corporation for a net cash amount of $18,986 after
payments of incentives to former PSI management. A pretax gain of $10,069 was
recognized in 1998, with an additional gain of $1,500 deferred pending
resolution of contingencies related to the transaction. In November 1997, the
Company sold its 23% interest in Melamine Chemicals, Inc. (Melamine) to Borden
Chemical Inc. for $26,138 in cash, recognizing a pretax gain of $14,684. With
these dispositions, the Company has no investments in equity affiliates at
December 31, 1998.

        Investment in affiliated companies accounted for by the equity method
was $7,138 at December 31, 1997. Equity earnings, net of taxes, were $2,497 and
$846, respectively, for the years ended December 31, 1997 and 1996. At December
31, 1997, affiliated company summary balances consisted of current assets of
$2,300, noncurrent assets of $22,004, current liabilities of $1,900, noncurrent
liabilities of $8,129 and net equity of $14,275.

        The terms of the January 1997 sale of Plasma Processing Corporation
included a note for $2,000. A pretax provision for $750 was made in the fourth
quarter of 1998 related to the note based on managements estimate of
collectibility.




                                                                              15
<PAGE>   33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

        On October 20, 1995, First Mississippi distributed to its shareholders
its entire ownership of Getchell Gold Corporation (Getchell), formerly known as
FirstMiss Gold Inc. Each First Mississippi shareholder received approximately
seven-tenths of a common share of Getchell for each share of First Mississippi
owned. At the date of the Getchell spinoff, the Company received a promissory
note in settlement of all prior cash advances. The note bears interest at a rate
based on the London Interbank Offered Rate (5.625% at December 31, 1998).
Interest and principal are due in September 2000. The aggregate unpaid principal
amount of the note, including accrued interest, of $28,918 and $27,138 at
December 31, 1998 and 1997, respectively, is included in other investments. In
November 1998, Getchell and Placer Dome Inc. announced plans to merge, with
completion of the transaction anticipated in the second quarter of 1999. If the
merger is completed, Getchell must prepay all principal and interest due to the
Company.

4.      INTANGIBLE AND OTHER ASSETS

        The major classes of intangible and other assets are summarized below:

<TABLE>
<CAPTION>
                                                                  December 31, 
                                                           -------------------------
                                                              1998           1997
                                                           ----------     ----------
<S>                                                        <C>            <C>   
        Goodwill                                           $   26,343         25,766
        Other                                                   1,055          1,350
                                                           ----------     ----------
                                                               27,398         27,116
        Less accumulated amortization                          11,036          9,198
                                                           ----------     ----------

                                                           $   16,362         17,918
                                                           ==========     ==========
</TABLE>

        The net carrying amounts of goodwill at December 31, 1998 and 1997 were
$15,890 and $17,036, respectively. Amortization expense amounted to $2,106 in
1998, $1,204 in 1997 and $1,535 in 1996.

5.      PROPERTY, PLANT AND EQUIPMENT

        A summary of property, plant and equipment, at cost, follows:

<TABLE>
<CAPTION>
                                                                                December 31,
                                                            Estimated    -------------------------
                                                           useful lives     1998           1997
                                                           ------------  ----------     ----------
<S>                                                        <C>           <C>            <C>  
        ASSETS AT COST:
          Land and land improvements                           10-20     $    6,856          6,759
          Buildings                                            20-45         31,075         25,591
          Plant facilities and equipment                       25-20        270,505        196,782
          Other facilities and equipment                       25-12         36,276         25,321
          Construction in progress                                           22,102         69,088
                                                                         ----------     ----------
             Total property, plant and equipment                            366,814        323,541
        Less accumulated depreciation and
          amortization                                                      139,413        118,964
                                                                         ----------     ----------
             Net property, plant and equipment                           $  227,401        204,577
                                                                         ==========     ==========
</TABLE>


        Depreciation and amortization expense related to the above was $21,582
in 1998, $16,050 in 1997 and $12,134 in 1996.

        Capitalized interest related to the above amounted to $915 in 1998, $141
in 1997 and $920 in 1996.




16

<PAGE>   34


6.      LONG-TERM DEBT AND CREDIT AGREEMENTS

        A summary of long-term debt follows:

<TABLE>
<CAPTION>
                                                                                December 31,
                                                                          -----------------------
                                                                             1998          1997
                                                                          ---------     ---------
<S>                                                                       <C>           <C>      
        Unsecured:
          Senior notes payable:
            Tranche A, 6.50%, due October 30, 2003                        $  15,000            --
            Tranche B, 6.75%, due October 30, 2005                            5,000            --
          Revolving credit facility, due May 2002                            41,000            --
          BK International Corporation note, 6.25%, due December 2002         3,956         3,693
          Other                                                                 228           482
                                                                          ---------     ---------
                                                                             65,184         4,175
          Secured                                                                23            43
                                                                          ---------     ---------
                                                                             65,207         4,218
        Less current installments of long-term debt                             251           277
                                                                          ---------     ---------

                                                                          $  64,956         3,941
                                                                          =========     =========
</TABLE>

        There were no compensating balance requirements under loan agreements in
effect at December 31, 1998. The above obligations mature in various amounts
through 2005, including $251 in 1999, $44,956 in 2002, $15,000 in 2003 and
$5,000 in 2005.

        In November 1998, the Company entered into a $20,000 private placement
of senior notes with two institutional investors. The Tranche A and B notes have
interest-only payments until October 30, 2003 and October 30, 2005, at interest
rates of 6.50% and 6.75%, respectively.

        The Company has a $100,000 bank revolving credit facility originating
June 1997, which is committed until May 2002. At December 31, 1998, there was a
balance of $41,000 outstanding under the facility at a weighted average rate of
5.85%. Outstanding letters of credit under the facility were $8,678, leaving
$50,322 available for borrowings. Interest rates are based on either the London
Interbank Offered Rate or the prime rate. A facility fee ranging from .125 to
 .150 of 1% per annum is charged. The facility fee was $126 for the year ended
December 31, 1998 and $80 for the period from June 1997 to December 31, 1997.
Prior to June 1997, the Company had a $65,000 bank revolving credit facility.
Interest rates were based on either the London Interbank Offered Rate or the
prime rate. Commitment fees for the period January 1997 through May 1997 and for
the year ended December 31, 1996, were $45 and $133, respectively.

        The senior notes and the revolving credit facility contain certain
convenants, the most significant of which require a specified ratio of earnings
before interest and taxes to cover fixed charges, maintaining a minimum net
worth amount, and a specified debt to capitalization ratio. At December 31,
1998, the Company was in compliance with these covenants.

        The Company has access to a $10,000 short-term uncommitted facility for
foreign or trade related borrowings. The facility, which originated during 1998
and expires in August 1999, is renewable at the Companys request and the banks
option. The total outstanding at December 31, 1998, was $5,354. Interest rates
are based on either the London Interbank Offered Rate or the Tokyo Interbank
Offered Rate. The average interest rate for the short-term facility was 1.15% at
year-end 1998.

        The Company also has access to an uncommitted facility for the issuance
of foreign currency letters of credit. The total outstanding at December 31,
1998, was $1,642. The possibility of default is considered remote but would
cause these letters of credit to come due immediately. If this occurred,
payments would be made from available cash or borrowings under the revolving
credit facility.




                                                                              17

<PAGE>   35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

        Total interest costs incurred for the years ended December 31, 1998,
1997 and 1996, were $2,901, $424 and $7,499, respectively.

7.      INCOME TAXES

        Total income tax expense (benefit) for the years ended December 31,
1998, 1997 and 1996, was allocated as follows:

<TABLE>
<CAPTION>
                                                                                 December 31, 
                                                                  ------------------------------------------
                                                                     1998            1997            1996
                                                                  ----------      ----------      ----------
<S>                                                               <C>             <C>             <C>   
        Continuing operations                                     $   15,440          23,050          10,471
        Discontinued operations                                       (1,586)            715           5,252
        Segment dispositions                                          (6,050)             --          (3,928)
        Stockholders equity related to compensation
                expense for tax purposes in excess of amounts
                recognized for financial reporting purposes             (678)           (886)         (1,308)
                                                                  ----------      ----------      ----------
                                                                  $    7,126          22,879          10,487
                                                                  ==========      ==========      ==========
</TABLE>


        Income tax expense differs from the statutory federal rate of 35%
applied to earnings from continuing operations before income taxes and investee
earnings for the years ended December 31, 1998, 1997 and 1996 as follows:

<TABLE>
<CAPTION>
                                                                                  December 31, 
                                                                   ------------------------------------------
                                                                      1998            1997            1996
                                                                   ----------      ----------      ----------
<S>                                                                <C>             <C>             <C>  
        Computed expected tax expense                              $   14,035          20,422           9,311
        State income taxes, net of federal income tax benefit           1,407           1,658             661
        Amortization of goodwill                                          394             388             131
        Exempt earnings of Foreign Sales Corporation                      (94)           (172)            (47)
        Increase in net cash surrender value of life insurance           (362)           (331)           (156)
        Tax provision adjustments for pending
          Internal Revenue Service (IRS) matters                           --             400             150
        Other, net                                                         60             685             421
                                                                   ----------      ----------      ----------
                 Actual tax expense of continuing operations       $   15,440          23,050          10,471
                                                                   ==========      ==========      ==========
</TABLE>

        Components of income tax expense are as follows:

<TABLE>
<CAPTION>
                                                                                  December 31,                 
                                                                   ------------------------------------------  
                                                                      1998            1997            1996     
                                                                   ----------      ----------      ----------  
<S>                                                                <C>             <C>             <C>     
        Current:                                                                                               
         Federal                                                   $    8,950          20,539          10,104  
         State                                                          2,169           2,515             942  
         Foreign                                                        1,264           1,250              --  
                                                                   ----------      ----------      ----------  
                                                                       12,383          24,304          11,046  
                                                                   ==========      ==========      ==========  
                                                                                                               
        Deferred:                                                                                              
         Federal                                                        3,062          (1,290)           (650) 
         State                                                             (5)             36              75  
         Foreign                                                           --              --              --  
                                                                   ----------      ----------      ----------  
                                                                        3,057          (1,254)           (575) 
                                                                   ==========      ==========      ==========  
                                                                                                               
        Total:                                                                                                 
         Federal                                                       12,012          19,249           9,454  
         State                                                          2,164           2,551           1,017  
         Foreign                                                        1,264           1,250              --  
                                                                   ----------      ----------      ----------  
                                                                   $   15,440          23,050          10,471  
                                                                   ==========      ==========      ==========  
</TABLE>




18
<PAGE>   36



        The significant components of deferred income tax expense attributable
to earnings from continuing operations are as follows:

<TABLE>
<CAPTION>
                                                                                December 31, 
                                                                     --------------------------------
                                                                        1998        1997       1996
                                                                     ----------  ---------   --------
<S>                                                                  <C>         <C>         <C>  
        Deferred tax expense (benefit) from changes in temporary
          differences                                                $    3,057     (1,254)      (575)
                                                                     ==========   ========   ======== 
</TABLE>

        The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and the deferred tax liabilities at December
31, 1998 and 1997, are as follows:

<TABLE>
<CAPTION>
                                                                       December 31, 
                                                                ------------------------
                                                                  1998           1997
                                                                ---------      ---------
<S>                                                             <C>            <C>
        Deferred tax assets:
          Note and accounts receivable, principally due to
            allowance for doubtful note receivable              $     317             37
          Deferred compensation                                     5,060          3,936
          Accrued incentive compensation                              464          1,323
          Inventory costs                                           1,803          1,144
          State net operating loss carryforward                        92             47
          Accrued vacation costs                                      767            672
          Accrued pension costs                                       980          1,143
          Other, net                                                1,103             --
                                                                ---------      ---------
                          Total deferred tax assets                10,586          8,302
                                                                ---------      ---------
        Deferred tax liabilities:
        Plant and equipment, principally due to differences
            in depreciation                                       (19,235)       (12,416)
        Undistributed earnings from equity affiliates                  --         (1,396)
        State income taxes                                         (1,714)        (1,709)
        Other, net                                                     --            (87)
                                                                ---------      ---------
               Total gross deferred tax liabilities               (20,949)       (15,608)
                                                                ---------      ---------
               Net deferred tax liability                       $ (10,363)        (7,306)
                                                                =========      =========
</TABLE>

        The net deferred tax liability at December 31, 1998 and 1997 consists of
a long-term deferred tax liability of $13,501 and $10,130, respectively, and a
current deferred tax asset of $3,138 and $2,824, respectively. The current
deferred tax asset is included in prepaid expenses and other current assets in
the consolidated balance sheets.

        In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, recoverable taxes
paid, projected taxable income and tax planning strategies in making this
assessment. Based on the reversal of existing deferred tax liabilities and
projections for future taxable income over the periods in which the deferred tax
assets are deductible, management believes it is more likely than not the
Company will realize the benefit of these deductible differences.

        Current income taxes payable of $3,569 at December 31, 1998, and
refundable income taxes of $2,655 at December 31, 1997, are included in accrued
expenses and other current liabilities and other receivables, respectively, in
the accompanying consolidated financial statements.




                                                                              19
<PAGE>   37

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

        As a result of the Merger described in note 1, the Company assumed
liability for the prior tax returns of First Mississippi. The federal income tax
returns have been examined through June 30, 1996, and all years prior to June
30, 1989 are closed. In December 1998, the Company agreed to a resolution of the
remaining disputed issues for the years ended June 30, 1989 through June 30,
1996. Management believes that adequate provision has been made for any
adjustments which might be assessed for open years through December 31, 1998.

8.      EMPLOYEE BENEFIT AND INCENTIVE PLANS

        The Company has a noncontributory defined benefit pension plan covering
substantially all full-time permanent employees. The benefits are based on years
of service and participants compensation during the last five years of
employment. The following tables present plan information at December 31, 1998
and 1997, and for the years ended December 31, 1998, 1997 and 1996: December 31,
                
<TABLE>
<CAPTION>
                                                                    1998           1997
                                                                  --------       --------
<S>                                                               <C>            <C>      
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year                           $ 37,494         27,020   
Service cost                                                         2,958          2,376   
Interest cost                                                        2,749          2,157   
Actuarial loss                                                       3,350          6,925   
Benefits paid                                                       (2,934)          (984)  
Curtailment gain                                                    (2,792)            --   
                                                                  --------       --------   
Benefit obligation at end of year                                 $ 40,825         37,494   
                                                                  ========       ========   
                                                                                            
CHANGE IN PLAN ASSETS                                                                       
Fair value of plan assets at beginning of year                    $ 36,206         29,620   
Actual return on plan assets                                         6,154          7,309   
Employer contribution                                                  105            261   
Benefits paid                                                       (2,934)          (984)  
                                                                  --------       --------   
Fair value of plan assets at end of year                          $ 39,531         36,206   
                                                                  ========       ========   
                                                                                            
                                                                                            
RECONCILIATION OF FUNDED STATUS                                                             
Funded status                                                     $ (1,294)        (1,288)  
Unrecognized net actuarial gain                                     (5,968)        (4,880)  
Unrecognized transition asset                                       (1,872)        (2,178)  
Unrecognized prior service cost                                        457          1,040   
                                                                  --------       --------   
Accrued pension liability                                         $ (8,677)        (7,306)  
                                                                  ========       ========   
</TABLE>

<TABLE>
<CAPTION>
                                                                 December 31,
WEIGHTED-AVERAGE ASSUMPTIONS                       --------------------------------------
        AS OF DECEMBER 31                            1998           1997           1996 
                                                   --------       --------       --------
<S>                                                <C>            <C>            <C>  
Discount rate - net periodic pension cost              7.50%          7.75%          7.75%
Discount rate - benefit obligations                    7.00%          7.50%          7.75%
Expected return on plan assets                         9.50%          9.00%          9.00%
Rate of compensation increase                          4.00%          4.00%          4.00%

COMPONENTS OF NET PERIODIC PENSION COST
Service cost                                       $  2,958          2,376          2,289
Interest cost                                         2,747          2,157          1,943
Expected return on plan assets                       (3,369)        (2,631)        (2,200)
Recognized net actuarial gain                          (645)          (243)          (170)
Amortization of transition asset                       (304)          (304)          (304)
Amortization of prior service cost                       89             89             88
                                                   --------       --------       --------
Net periodic pension cost                          $  1,476          1,444          1,646
                                                   ========       ========       ========
</TABLE>





20

<PAGE>   38

        Net annual pension expense allocated to discontinued operations was
$1,211, $1,162 and $1,354 for the years ended December 31, 1998, 1997 and 1996,
respectively. Plan assets are invested primarily in equity securities and U. S.
Government and corporate bonds.

        The Company has a contributory 401(k) savings plan and an employee stock
ownership plan, both of which cover substantially all eligible employees who
have completed six months of service. Total expense under the plans amounted to
approximately $1,116, $1,038 and $813 for the years ended December 31, 1998,
1997 and 1996, respectively. These plans and the pension plan invest in the
Companys stock. The total number of shares held by the plans at December 31,
1998 and 1997, was 387,261 and 355,964, respectively.

        The Company has various nonqualified plans that act to restore earned
benefits limited by income tax regulations, or allow for other compensation
deferrals. Beginning in July 1997, participants in certain of these plans could
elect to convert existing deferred balances and/or future deferrals, at the
start of each new year, into phantom share units tracking the performance of the
Companys stock. Additionally, a 15 percent discount on the market value of the
stock at the original conversion date and each new plan year is given to those
participants making this election. Beginning in 1998, Company officers could
elect to defer a portion of salary and/or bonuses into phantom share units on a
pretax basis at a 15 percent discount. The total liability for these deferrals
at December 31, 1998 is $936. The nonqualified supplemental pension plan
provides for incremental pension payments from the Companys funds, and is based
on the same actuarial assumptions as the qualified plan. The total liability
relating to this unfunded plan at December 31, 1998 and 1997, was $1,689 and
$1,378, respectively. Net annual pension expense for this plan was $311, $77
(net of an actuarial adjustment of $233), and $250 for the years ended December
31, 1998, 1997 and 1996, respectively. The cost of the nonqualified 401(k) and
ESOP plans was $355, $622 and $274 for the years ended December 1998, 1997 and
1996, respectively. Individual life insurance contracts were purchased, with the
Company as beneficiary, to assist in the funding of portions of certain
nonqualified deferred compensation plans covering directors, officers and key
employees. The expense for these plans was $896, $795 and $802 for the years
ended December 31, 1998, 1997 and 1996, respectively.

        Directors, officers and certain key employees of the Company participate
in the long-term incentive plans (the Plans) under which the Company has
reserved shares of common stock for issuance. Awards under the Plans include
stock options, options to purchase debentures convertible into preferred stock
and then convertible into common stock of the Company, stock appreciation
rights, performance units, restricted stock, supplemental cash and such other
forms as the Board of Directors may direct. Options under all plans are granted
at the market price of the shares on the date of the grants, with vesting
occurring no earlier than six months after grant and expiration no later than 10
years after grant. At December 31, 1998, shares available for grant under the
referenced plans totaled 694,113 shares of common stock. Additional information
follows:

<TABLE>
<CAPTION>
                                                         STOCK OPTIONS               DEBENTURE OPTIONS 
                                                  ---------------------------------------------------------
                                                                   AVERAGE                        AVERAGE 
                                                    NUMBER      OPTION PRICE       NUMBER        OPTION PRICE
                                                  OF SHARES       PER SHARE       OF SHARES       PER SHARE 
                                                  ----------      ----------     ----------      ----------
<S>                                               <C>           <C>              <C>             <C> 
        Balance December 31, 1995                    316,451      $    19.64      336,168 $            8.92
          Options granted before spinoff             227,050           24.05             --              -- 
          Options exercised before spinoff           (41,704)          19.42        (10,143)          10.12
          Option conversion adjustment - MCC*        120,902              --         81,525              -- 
          Options forfeited                          (18,251)          22.34             --              -- 
                                                  ----------      ----------     ----------      ----------
        Balance December 31, 1996                    604,448           17.30        407,550            7.10
          Options granted                            479,910           23.30             --              -- 
          Options exercised                          (65,620)          14.43        (78,492)           6.74
          Options forfeited                           (6,800)          23.13             --              -- 
                                                  ----------      ----------     ----------      ----------
        Balance December 31, 1997                  1,011,938           20.34        329,058            7.19
          Options granted                            376,725           26.54             --              -- 
          Options exercised                          (43,102)          17.80       (116,730)           7.72
          Options forfeited                         (127,015)          23.93             --              -- 
                                                  ----------      ----------     ----------      ----------
        Balance December 31, 1998                  1,218,546      $    21.93        212,328      $     6.90
                                                  ==========      ==========     ==========      ==========
        Exercisable December 31, 1998                651,005      $    19.18        212,328      $     6.90
                                                  ==========      ==========     ==========      ==========
</TABLE>





                                                                              21

<PAGE>   39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

        * The number of shares of common stock underlying outstanding
debentures, debenture options and nonqualifying stock options, as well as stock
option prices, were adjusted to reflect the distribution value of the fertilizer
business sale (note 2). This adjustment, which increased the number of shares
underlying the outstanding awards and reduced the exercise prices by a factor of
1.25 is reflected in the total number of shares and ending average option prices
at December 31, 1998, 1997 and 1996.

        In accordance with SFAS No. 123, the following additional disclosures
are required related to stock-based compensation shares granted during the
three-year period ended December 31, 1998:

        The fair value of each grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants made during the years ended December 31, 1998, 1997
and 1996, respectively: dividend yields of 1.5, 1.7 and 2.1 percent; expected
volatilities of 33, 26 and 25 percent; risk-free interest rates of 6.1, 6.8 and
6.9 percent, and expected lives of four years for all periods presented. A
summary of the status of the Companys stock-based compensation shares at
December 31, 1998, 1997 and 1996, and changes during the years ended on those
dates is presented below:

<TABLE>
<CAPTION>
                                     1998          WEIGHTED-AVG.      1997          Weighted-avg.       1996         Weighted-avg. 
                                    SHARES        EXERCISE PRICE     Shares        exercise price      Shares       exercise price 
                                  -----------      -----------     -----------      -----------     -----------      -----------
<S>                               <C>             <C>              <C>             <C>              <C>             <C> 
Outstanding at beginning of year    1,012,904      $     20.84         551,212     $      18.33       269,598       $      21.59
Granted                               394,108            26.02         518,010            23.18         227,050            24.05
Exercised before spinoff                   --               --              --               --         (37,437)           20.56
Spinoff conversion adjustments             --               --              --               --         110,252               -- 
Exercised after spinoff               (77,982)           20.18         (49,518)           16.98              --               -- 
Forfeited                            (127,015)           23.93          (6,800)           23.13         (18,251)           22.34
                                  -----------      -----------     -----------      -----------     -----------      -----------
Outstanding at end of year          1,202,015      $     22.26       1,012,904      $     20.84         551,212      $     18.33
                                  -----------      -----------     -----------      -----------     -----------      -----------
Exercisable at end of year            634,474                          501,694                          283,773
                                  ===========                      ===========                      ===========
Weighted-average fair value                        $      7.86                      $      6.11                      $      4.93
                                                   ===========                      ===========                      ===========
</TABLE>


        The following table summarizes information about stock-based
compensation shares for the period ended December 31, 1998:

<TABLE>
<CAPTION>
                           OUTSTANDING                                              EXERCISABLE     
------------------------------------------------------------------------   ------------------------------
                                     WEIGHTED-AVG.
    RANGE OF          NUMBER           REMAINING          WEIGHTED-AVG.      NUMBER        WEIGHTED-AVG. 
EXERCISE PRICES    OUTSTANDING      CONTRACTUAL LIFE      EXERCISE PRICE   EXERCISABLE     EXERCISE PRICE
---------------    -----------      ----------------      --------------   -----------     --------------
<S>                <C>              <C>                   <C>              <C>             <C>     
 $16.30-$26.75      1,202,015          8.1 years             $ 22.26         634,474         $ 19.32 
===============    ==========          =========             =======         =======         =======
</TABLE>

        The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its stock-based compensation plans. Had compensation cost been determined
based on the fair value at the grant dates for awards under the plan consistent
with the method prescribed by SFAS No. 123, the Companys net income, earnings
per common share and earnings per common share, assuming dilution, would have
been reduced to the pro forma amounts indicated below for the years ended
December 31:

<TABLE>
<CAPTION>
                                                                           1998        1997         1996 
                                                                        ----------  ----------  ------------
<S>                                                                     <C>         <C>         <C>         
        Net earnings                                    As reported     $  10,092   $   38,898  $    249,860
                                                        Pro forma       $   8,998   $   37,955  $    248,902

        Earnings per common share                       As reported     $     .52   $     1.91  $      12.12
                                                        Pro forma       $     .47   $     1.86  $      12.07

        Earnings per common share, assuming dilution    As reported     $     .52   $     1.86  $      11.95*
                                                        Pro forma       $     .46   $     1.82  $      11.90*
</TABLE>

        * Dilutive earnings per share for 1996 differs from last years
          historical presentation due to restated continuing operations effect
          on the calculation.



22

<PAGE>   40


9.      STOCKHOLDERS' EQUITY

        Earnings per common share calculations are based on the weighted average
number of common shares outstanding during each year. Calculations for fully
diluted earnings per common share are based on the weighted average number of
outstanding common shares and common share equivalents during each year. A
reconciliation of the numerators and denominators for basic and diluted per
share computations from continuing operations for the years ended December 31,
1998, 1997 and 1996 follows:

<TABLE>
<CAPTION>
                                                                Weighted-avg.
                                                  Income           Shares          Per Share
                                                (Numerator)     Denominator)        Amount 
                                               ------------     ------------     ------------
<S>                                            <C>              <C>              <C>         
BASIC EPS
Earnings from continuing operations - 1998     $     24,660       19,255,344     $       1.28
Effect of Dilutive Securities
Options                                                  --           79,178               -- 
Convertible debentures                                   --          144,300               -- 
                                               ------------     ------------     ------------
DILUTED EPS
Earnings from continuing operations - 1998     $     24,660       19,478,822     $       1.27
                                               ============     ============     ============
BASIC EPS
Earnings from continuing operations - 1997     $     37,795       20,395,060     $       1.85
Effect of Dilutive Securities
Options                                                  --          195,867               -- 
Convertible debentures                                   --          296,825               -- 
                                               ------------     ------------     ------------
DILUTED EPS
Loss from continuing operations - 1997         $     37,795       20,887,752     $       1.81
                                               ============     ============     ============
BASIC EPS
Earnings from continuing operations - 1996     $     16,977       20,615,087     $        .83
Effect of Dilutive Securities
Options                                                  --           78,249               -- 
Convertible debentures                                   --          215,827               -- 
                                               ------------     ------------     ------------
DILUTED EPS
Earnings from continuing operations - 1996     $     16,977       20,909,163     $        .81
                                               ============     ============     ============
</TABLE>


        In connection with the Shareholder Rights Plan adopted by the Company on
October 30, 1996, preferred stock purchase rights were distributed to
stockholders and are deemed to be attached to the outstanding shares of common
stock of the Company. Under certain conditions, each right may be exercised to
purchase one one-hundredth (1/100) of a share of a new series of preferred
stock, at an exercise price of $100 per share (subject to adjustment). The
rights, which do not have voting rights, expire in 2006 and may be redeemed by
the Company at a price of $0.01 per right prior to a specified period of time
after the occurrence of certain events. In certain events, each right (except
certain rights beneficially owned by 10% or more owners, which rights are
voided) will entitle its holder to purchase shares of common stock with a value
of twice the then-current exercise price.

        In August 1998, the Companys directors authorized a $50,000 stock
repurchase program. This addition brings total repurchase authorizations, since
inception at January 1997, to $110,000.




                                                                              23

<PAGE>   41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

10.     COMMITMENTS AND CONTINGENT LIABILITIES

        The Company has entered into various operating leases for transportation
equipment (primarily railroad tank cars), chemical pipelines and storage
facilities, office buildings and land and other miscellaneous items of
equipment. The following is a schedule by years of future minimum rental
payments for those operating leases with initial or remaining noncancelable
terms in excess of one year, as of December 31, 1998:

<TABLE>
<CAPTION>
        Years ending                                        Operating
        December 31,                                          Leases
        ------------                                        ---------
<S>                                                         <C>      
        1999                                                $   1,037
        2000                                                    1,204
        2001                                                    1,171
        2002                                                    1,141 
        2003                                                      731
        Later years                                             2,573
                                                            ---------
        Total minimum payments required                     $   7,857
                                                            =========
</TABLE>

        Provisions applicable to certain transportation equipment leases provide
for mileage credits computed on the basis of usage. No recognition has been
given to the effect of such credits in the amounts presented above.

        Rental expense, including short-term rentals (net of mileage credits and
short-term subleases of approximately $483, $407 and $244 for the years ended
December 31, 1998, 1997 and 1996, respectively), was approximately $1,590, $781
and $1,012 for the years ended December 31, 1998, 1997 and 1996, respectively.
In most cases management expects that leases will be renewed or replaced by
other leases in the normal course of business.

        Company operations are subject to a wide variety of environmental laws
and regulations governing emissions to the air, discharges to water sources, and
the handling, storage, treatment and disposal of waste materials, as well as
other laws and regulations concerning health and safety conditions. The Company
accrues for anticipated costs associated with investigatory and remediation
efforts relating to the environment. At December 31, 1998 and 1997, the Companys
estimated liability for these matters totaled $1,338 and $1,399, respectively,
for discontinued operations. The estimated liability related to continuing
operations at December 31, 1998 was $244.

        The Company has pending several claims incurred in the normal course of
business which, in the opinion of management and legal counsel, can be disposed
of without material effect on the accompanying consolidated financial
statements.

11.     INTEREST AND OTHER INCOME

        Interest and other income, net, items are as follows: 

<TABLE>
<CAPTION>
                                                                 December 31, 
                                                     -----------------------------------
                                                       1998          1997         1996 
                                                     --------      --------     --------
<S>                                                  <C>           <C>          <C>  
        Interest income                              $  2,198         3,282        2,067
        Royalty, license, rental and fee income         4,280         3,830        2,329
        Gain on sale of Melamine Chemicals, Inc. 
          and Power Sources, Inc. (note 3)             10,069        14,684           --
        Net gain on disposition of other
          noncurrent assets                                19           159          546
        Other                                            (130)          175           73
                                                     --------      --------     --------
                                                     $ 16,436        22,130        5,015
                                                     ========      ========     ========
</TABLE>





24

<PAGE>   42
12.     SEGMENT INFORMATION

        The Company operates in two segments: Electronic and Other Specialty
Chemicals and Polyurethane Chemicals. The Electronic and Other Specialty
Chemicals segment produces specialty chemicals for use by others in electronic,
agricultural, pharmaceutical, polymer and photosensitive applications. These
chemicals are typically produced by multi-step batch processing with products
sold both on specification and performance. This segment includes research and
development for new products and processes. The Polyurethane Chemicals segment
produces aniline and nitrobenzene by a continuous production process. These
chemicals generally require more processing to produce the end product used by
consumers and are primarily sold under long-term contracts to industrial
customers. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. The Company
evaluates performance and allocates resources based on the segments profit or
loss from operations before interest income and expense and income taxes. The
Company's reportable segments are based on similarities in products and
services, type and class of customers, production processes and methods of
distribution.

        The polyurethane chemicals segment had unaffiliated major customer sales
of $99,522, $86,806 and $75,910 for the years ended December 31, 1998, 1997 and
1996, respectively.

        The following is a breakdown by segment of certain Company financial
information at December 31, 1998, 1997 and 1996 and for each of the years then
ended: 

<TABLE>
<CAPTION>
                                                                    December 31,
                                                       ---------------------------------------
                                                         1998           1997           1996
                                                       ---------      ---------      ---------
<S>                                                    <C>            <C>            <C>    
        Sales to unaffiliated customers:
          Electronic and Other Specialty Chemicals     $ 179,579        179,549        150,873
          Polyurethane Chemicals                         125,525        118,273         95,139
                                                       ---------      ---------      ---------
               Total                                   $ 305,104        297,822        246,012
                                                       =========      =========      =========
        Operating profit before income taxes
          and investee earnings:
          Electronic and Other Specialty Chemicals     $  17,796         27,617         22,536
          Polyurethane Chemicals                          22,648         24,071         21,057
                                                       ---------      ---------      ---------
                                                          40,444         51,688         43,593
        Unallocated corporate expenses                    (9,781)       (11,347)       (13,324)
        Interest income (expense), net                       213          3,009         (3,926)
        Other income, net                                  9,224         14,998            259
                                                       ---------      ---------      ---------
               Total                                   $  40,100         58,348         26,602
                                                       =========      =========      =========
        Depreciation and amortization:
          Electronic and Other Specialty Chemicals     $  14,623         12,541         10,382
          Polyurethane Chemicals                           8,148          4,341          2,844
          Corporate                                          917            372            443
                                                       ---------      ---------      ---------
               Total                                   $  23,688         17,254         13,669
                                                       =========      =========      =========
        Identifiable assets:
          Electronic and Other Specialty Chemicals     $ 214,192        224,778        162,807
          Polyurethane Chemicals                         113,217         81,844         45,374
                                                       ---------      ---------      ---------
                                                         327,409        306,622        208,181
          Corporate                                       63,716         62,305        120,260
          Discontinued operations                         52,309         64,170         65,723
                                                       ---------      ---------      ---------
               Total                                   $ 443,434        433,097        394,164
                                                       =========      =========      =========
        Capital expenditures:
          Electronic and Other Specialty Chemicals        25,306         36,692         40,411
          Polyurethane Chemicals                       $  11,421         47,910          8,259
          Corporate                                        7,059          6,840            219
                                                       ---------      ---------      ---------
               Total                                   $  43,786         91,442         48,889
                                                       =========      =========      =========
</TABLE>




                                                                              25

<PAGE>   43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

        Revenues from sales to all foreign countries were $46,207, $43,096 and
$36,982 in 1998, 1997 and 1996, respectively, and are attributed to those
countries based on ship-to location of customers. Identifiable assets in foreign
countries were $17,386, $7,736 and $5,881.

        Identifiable assets by segment are those assets used in the Companys
operations. Corporate assets and investments are principally cash and cash
equivalents, nontrade receivables and certain other investments.

        The Company performs ongoing credit evaluations of its customers and
generally does not require collateral on trade receivables. The Company believes
that adequate allowances are maintained for any uncollectible trade receivables.
Certain corporate expenses, primarily those related to the overall management of
the Company, were not allocated to the operating segments.

13.     QUARTERLY FINANCIAL DATA (UNAUDITED)

        Selected quarterly financial data follows:

<TABLE>
<CAPTION>
                                                                        Quarters ended                            Year ended
                                              ------------------------------------------------------------------------------
                                                  03/31             06/30          09/30             12/31          12/31
                                              --------------     -----------     -----------      -----------     ----------
<S>                                           <C>                <C>             <C>              <C>             <C>    
        1998:
        Sales                                 $       74,173          78,100          74,752           78,079        305,104
                                              ==============     ===========     ===========      ===========     ==========
        Gross profit                          $       18,252          19,283          19,718           18,935         76,188
                                              ==============     ===========     ===========      ===========     ==========
        Earnings from
            continuing operations             $        9,445           3,853           5,107            6,255         24,660
                                              ==============     ===========     ===========      ===========     ==========
        Net earnings (loss)                   $        9,753           3,954          (7,687)           4,072         10,092
                                              ==============     ===========     ===========      ===========     ==========
        Earnings (loss) per common share:
          Continuing operations               $          .47             .20             .27              .33           1.28
                                              ==============     ===========     ===========      ===========     ==========
          Net earnings (loss)                 $          .49             .20            (.41)             .22            .52
                                              ==============     ===========     ===========      ===========     ==========
          Earnings (loss) per common
            share, assuming dilution:
          Continuing operations               $          .47             .19            . 27              .33           1.27
                                              ==============     ===========     ===========      ===========     ==========
          Net earnings (loss)                 $          .48             .20            (.40)             .22            .52
                                              ==============     ===========     ===========      ===========     ==========
</TABLE>

        Net earnings during the first quarter of 1998 included the gain on the
sale of Power Sources, Inc. (note 3), while results in the third quarter reflect
charges related to the discontinuance of steel operations.

<TABLE>
<CAPTION>
                                                                      Quarters ended                                   Year ended
                                         ------------------------------------------------------------------------------------------
                                             03/31               06/30             09/30              12/31              12/31
                                         --------------     --------------     --------------     --------------     --------------
<S>                                      <C>                <C>                <C>                <C>                <C>    
        1997:
        Sales                            $       74,473             72,018             69,743             81,588            297,822
                                         ==============     ==============     ==============     ==============     ==============
        Gross profit                     $       19,701             18,842             20,243             21,650             80,436
                                         ==============     ==============     ==============     ==============     ==============
        Earnings from
            continuing operations        $        7,958              7,379              6,623             15,835             37,795
                                         ==============     ==============     ==============     ==============     ==============
        Net earnings                     $        8,119              7,875              6,800             16,104             38,898
                                         ==============     ==============     ==============     ==============     ==============
        Earnings per common share:
          Continuing operations          $          .38                .36                .33                .78               1.85
                                         ==============     ==============     ==============     ==============     ==============
          Net earnings                   $          .39                .39                .33                .80               1.91
                                         ==============     ==============     ==============     ==============     ==============
          Earnings per common share,
            assuming dilution:
          Continuing operations          $          .38                .35                .32                .76               1.81
                                         ==============     ==============     ==============     ==============     ==============
          Net earnings                   $          .39                .38                .33                .78               1.86
                                         ==============     ==============     ==============     ==============     ==============
</TABLE>





26
<PAGE>   44

        Net earnings increased during the fourth quarter of 1997 due to the gain
on the sale of Melamine Chemicals, Inc. (note 3).

        The above quarterly earnings (loss) per share calculations are based on
the weighted average number of common shares outstanding during each quarter for
earnings (loss) per common share and the weighted average number of outstanding
common shares and common share equivalents during each quarter for the earnings
(loss) per common share, assuming dilution. The annual earnings (loss) per share
calculations are based on the weighted average number of common shares
outstanding during each year for earnings (loss) per common share and the
weighted average number of outstanding common shares and common share
equivalents during each year for earnings (loss) per common share, assuming
dilution.

14.     VALUATION AND QUALIFYING ACCOUNTS 

        Details regarding the valuation allowances for discontinued operations
and doubtful trade accounts for continuing operations are as follows:

<TABLE>
<CAPTION>
                                                    CHARGED TO     OTHER   
                                        BEGINNING   COSTS AND    ADDITIONS      ENDING
                                         BALANCE     EXPENSES  (DEDUCTIONS)*   BALANCE
                                        ---------   ---------- -------------   -------
<S>                                     <C>         <C>        <C>             <C>   
        Year ended December 31, 1998    $ 10,222      15,063          29        25,314

        Year ended December 31, 1997    $ 24,433          12     (14,223)       10,222

        Year ended December 31, 1996    $     13      24,432         (12)       24,433 
</TABLE>


        *  Businesses disposed and/or amounts written off.

15.     FINANCIAL INSTRUMENTS

        FAIR VALUE OF FINANCIAL INSTRUMENTS

        At December 31, 1998 and 1997, cash and cash equivalents, trade
receivables, notes receivable, trade payables, accrued liabilities and notes
payable are reflected in the financial statements at fair value. The $20,000
senior notes, placed with institutional investors in November 1998, approximate
fair value based on current rates offered the Company for debt of similar
characteristics and maturities. The revolving credit facilities have floating
interest rates and approximate fair value.

        DERIVATIVE FINANCIAL INSTRUMENTS

        The Company enters into forward foreign exchange contracts to minimize
its exposure related to foreign receivables denominated in yen. To lessen the
short-term effect of exchange rate fluctuations on consolidated performance, the
Company hedges a portion of these yen-denominated receivables and future sales
commitments. The forward contracts related to existing receivables are
marked-to-market each month and offset the underlying hedged transaction. Gains
and losses on contracts related to firm sales commitments are deferred and
recorded in net income in the period in which the related transactions are
consummated. The open contracts at December 31, 1998, represent forward sales of
664,500,000 yen with a U.S. dollar value of $5,857 and have terms of one year or
less.




                                                                              27
<PAGE>   45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED

16.     YEAR 2000 (UNAUDITED)

        In 1996, the Company began a study which led to the purchase in 1997 of
a company-wide Enterprise Resource Planning (ERP) system to integrate the
Companys information systems, replacing small, stand-alone purchased systems.
The ERP system will be Year 2000 compliant, with the material portion of the
system planned for completion by the middle of 1999. Installation is being
completed in stages, with the first sites converted at December 31, 1998. To
date, the Company has spent $8,900 on this project, and is projecting to spend
approximately $2,000 in 1999 on this project. If difficulties are encountered
that delay the ERP system implementation, contingency plans provide for the
purchase of select Year 2000 compliant personal computer software products, the
cost of which should not be material.

        A corporate-wide survey of other information technology (IT) and non-IT
equipment and systems utilizing date or time functions has been undertaken. The
current estimated cost to remediate is less than $600, most of which will be
incurred in 1999. Remediation, including verification testing, of most
noncompliant systems, equipment and software is targeted for completion by April
30, 1999. Some remediations at the Pascagoula facility, however, will occur in
the fourth quarter of 1999 to coincide with the next scheduled plant maintenance
turnaround. Contingency plans are currently being developed in the event the
remediations do not occur or are delayed. Severe delay or widespread failure
affecting both the remediation effort and the contingency plans, although not
expected, could have a material effect on the Companys financial condition and
results of operations.

        Key customers, as well as service and raw material suppliers, are being
surveyed about their Year 2000 readiness. Depending on their responses,
contingency plans will be developed as appropriate. It is anticipated that this
process will be completed no later than September 30, 1999. Although the Company
cannot quantify the precise effect, significant or prolonged disruptions of key
customers or suppliers could have a material effect on the Companys financial
condition and results of operations. For example, the majority of aniline
produced by the Company is sold through long-term contracts to a few customers.
Their inability to utilize the Companys aniline could have a material adverse
effect.


INDEPENDENT AUDITORS REPORT

The Board of Directors and Stockholders
ChemFirst Inc.

        We have audited the consolidated balance sheets of ChemFirst Inc. and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders equity and cash flows for each of the
years in the three-year period ended December 31, 1998. These consolidated
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

        We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ChemFirst
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.



Jackson, Mississippi                                     KPMG Peat Marwick LLP
February 19, 1999





28
<PAGE>   46








CHEMFIRST INC.         POST OFFICE BOX 1249      JACKSON, MISSISSIPPI 39215-1249