<PAGE>
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                                   FORM 10-K
                            ------------------------
 
              /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
                                       OR
 
            / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE TRANSITION PERIOD FROM             TO
                            ------------------------
 
                        COMMISSION FILE NUMBER 333-17827
 
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<S>                                                       <C>
                        DELAWARE                                                 51-0376469
                (State of Incorporation)                            (I.R.S. Employer Identification No.)
 
                 818 WASHINGTON STREET
                  WILMINGTON, DELAWARE                                             19801
        (Address of Principal Executive Offices)                                 (Zip Code)
</TABLE>
 
              REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
 
                                 (302) 428-0847
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
<TABLE>
<S>                                                       <C>
                                                                          NAME OF EACH EXCHANGE ON
                  TITLE OF EACH CLASS                                         WHICH REGISTERED
                  -------------------                                         ----------------      
         Common Stock, par value $.01 per share                           New York Stock Exchange
</TABLE>
 
       SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:  None
                            ------------------------
 
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _
 
     Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
 
     As of March 19, 1999, 68,686,406 shares of common stock of the registrant
were outstanding. The aggregate market value of the voting stock held by
non-affiliates of the registrant as of March 19, 1999 was $122,533,408. The
aggregate market value was computed by reference to the closing price on the New
York Stock Exchange of common stock of the registrant on such date ($8.00). For
purposes of the computation, voting stock held by executive officers and
directors of the registrant has been excluded. Such exclusion is not intended,
and shall not be deemed, to be an admission that such executive officers and
directors are affiliates of the registrant.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
     The Proxy Statement for the 1999 Annual Meeting of Stockholders of
International Specialty Products Inc. to be filed within 120 days after the
registrant's fiscal year-end (the "Proxy Statement") is incorporated by
reference in Part III, Items 10, 11, 12 and 13.
 
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<PAGE>
                                     PART I
 
ITEM 1. BUSINESS
 
GENERAL
 
     International Specialty Products Inc. (formerly ISP Holdings Inc.) ("ISP")
is a leading multinational manufacturer of specialty chemicals, mineral products
and filter products.
 
     We operate our business exclusively through our direct and indirect
subsidiaries, including ISP Opco Holdings Inc., ISP Chemicals Inc., ISP
Technologies Inc., ISP Van Dyk Inc., ISP Fine Chemicals Inc. and ISP Freetown
Fine Chemicals Inc. We were incorporated in Delaware in 1996.
 
     On July 15, 1998, International Specialty Products Inc. ("Old ISP") merged
with and into our company (then known as ISP Holdings Inc. ("ISP Holdings")). In
connection with the merger, each share of common stock of Old ISP (other than
those held by ISP Holdings) was automatically converted into one share of common
stock of the surviving corporation, substantially all of the assets and
liabilities of Old ISP were transferred to our subsidiary, ISP Opco Holdings
Inc., and we changed our name to International Specialty Products Inc.
Approximately 76% of our outstanding common stock is owned beneficially (as
defined in Rule 13d-3 of the Securities Exchange Act of 1934) by Samuel J.
Heyman, our Chairman of the Board of Directors and Chief Executive Officer.
 
     Prior to January 1, 1997, ISP Holdings was a wholly-owned subsidiary of GAF
Corporation. On January 1, 1997, GAF effected a series of transactions involving
its subsidiaries that resulted in, among other things, the capital stock of ISP
Holdings being distributed to the stockholders of GAF. As a result of this
distribution, we are no longer a subsidiary of GAF, and the assets and
liabilities of other wholly-owned subsidiaries of GAF, including G-I Holdings
Inc., Building Materials Corporation of America, U.S. Intec, Inc. and GAF
Fiberglass Corporation, are no longer included in our assets and liabilities.
 
     The address and telephone number of our principal executive offices are 818
Washington Street, Wilmington, Delaware 19801, (302) 428-0847.
 
     Financial information concerning our industry segments and foreign and
domestic operations required by Item 1 is included in Notes 13 and 14 to
Consolidated Financial Statements contained in this Annual Report on Form 10-K.
 
SPECIALTY CHEMICALS
 
     Products and Markets.  We manufacture a broad spectrum of specialty
chemicals having numerous applications in consumer and industrial products. We
use proprietary technology to convert various raw materials, through a chain of
one or more processing steps, into increasingly complex and higher value-added
specialty chemicals specifically developed to meet customer requirements.
 
     Our specialty chemicals business is organized based upon the markets for
our products. Accordingly, we manage our specialty chemicals in the following
three business segments:
 
          o Personal Care--whose products are sold to the skin care and hair
            care markets;
 
          o Pharmaceutical, Agricultural and Beverage--whose products are sold
            to these three government-regulated industries; and
 
          o Performance Chemicals, Fine Chemicals and Industrial--whose products
            are sold to numerous consumer and industrial markets.
 
     For the year ended December 31, 1998, sales of specialty chemicals
represented approximately 84% of our revenues. Most of our specialty chemical
products fall within the following categories:
 
          o vinyl ether monomers--includes several products for use in specialty
            and radiation-cured coatings. Our vinyl ether monomers are marketed
            by our Performance Chemicals group of our Performance Chemicals,
            Fine Chemicals and Industrial business segment.
 
                                       1
<PAGE>
          o vinyl ether copolymers--includes our GANTREZ(Registered) line of
            products. These products serve as a bioadhesive resin in such
            consumer products as tartar-control toothpaste, denture adhesives
            and facial pore strips. Vinyl ether copolymers are marketed by the
            Personal Care and Pharmaceutical, Agricultural and Beverage business
            segments.
 
          o polyvinyl pyrrolidone (PVP) polymers and copolymers--represents our
            largest product group. These polymers and copolymers are marketed by
            all of our business segments. Our PLASDONE(Registered),
            POLYCLAR(Registered) and GAFQUAT(Registered) product lines, which
            are used as tablet binders, beverage clarifiers and hair fixative
            resins, respectively, are included in this group.
 
          o intermediates--includes butanediol, butenediol, butynediol and
            propargyl alcohol for use in numerous industrial applications.
            Intermediates are marketed by our Performance Chemicals, Fine
            Chemicals and Industrial business segment. Our largest selling
            intermediate product is butanediol, which is utilized by industrial
            companies to manufacture spandex fibers and polybutylene
            terephthalate (PBT) plastics for use in automobiles.
 
          o solvents--includes our M-PYROL(Registered) brand of N-methyl
            pyrrolidone (NMP), for use in metal degreasing and paint stripping,
            BLO(Registered) brand of gamma-butyrolactone, for use by electronics
            companies in the manufacture of semiconductors and micro-processing
            chips, and tetrahydrofuran (THF), which is used in the manufacture
            and installation of PVC pipe. Solvents are also marketed by our
            Performance Chemicals, Fine Chemicals and Industrial business
            segment.
 
     The balance of our specialty chemical products include fine chemicals,
sunscreens, preservatives, emollients and advanced materials. These products are
marketed by all of our business segments.
 
     Personal Care.  Our Personal Care business segment markets numerous
specialty chemicals that serve as critical ingredients in the formulation of
many well-known skin care, hair care, toiletry and cosmetic products.
 
     Our skin care ingredients include:
 
          o ultraviolet (UV) light absorbing chemicals, which serve as
            sunscreens;
 
          o emollients, which provide skin softness;
 
          o moisturizers, which enhance the skin's water balance;
 
          o waterproofing agents, which enhance the performance of eye-liners
            and sunscreens in wet environments; and
 
          o preservatives, which extend the shelf life of aqueous-based cosmetic
            formulations by preventing the growth of harmful bacteria.
 
     Our ESCALOL(Registered) sunscreen actives serve as the primary active
ingredient in many of the most popular sunscreens today and increasingly find
applications in many other products such as lipsticks and facial creams. Our
CERAPHYL(Registered) line of emollients and moisturizers provides a variety of
popular bath products with their softening and moisturizing characteristics. We
produce a growing number of specialty preservatives, including
GERMALL(Registered) PLUS, a patented product that offers broad-spectrum
anti-microbial activity, and SUTTOCIDE(Registered) A, a preservative gentle
enough for infant care products.
 
     Our hair care ingredients, marketed under the GANTREZ(Registered),
GAFQUAT(Registered) and PVP/VA family of products, include a number of specially
formulated fixative resins which provide hairsprays, mousses and gels with their
holding power, as well as thickeners and stabilizers for shampoos and
conditioners. Utilizing our combined expertise in hair care and sunscreen
applications, we recently developed the world's first high performance hair
protectant, ESCALOL(Registered) HP-610, to prevent sun damage to hair.
 
     Pharmaceutical, Agricultural and Beverage.  Our specialty chemicals for the
Pharmaceutical, Agricultural and Beverage markets provide a number of end-use
products with their unique properties, while enabling these products to meet
increasingly strict regulatory requirements.
 
                                       2
<PAGE>
     In the pharmaceutical market, our specialty chemicals serve as key
ingredients in the following types of products:
 
          o prescription and over-the-counter tablets;
 
          o injectable prescription drugs and serums;
 
          o cough syrups;
 
          o antiseptics;
 
          o toothpastes; and
 
          o denture adhesives.
 
     Our PLASDONE(Registered) and POLYPLASDONE(Registered) polymers for tablet
binders and tablet disintegrants are established excipients for use in the
production of wet granulated tablets, and our GANTREZ(Registered) bioadhesive
polymers serve as critical ingredients in denture adhesives and tartar control
toothpastes.
 
     We believe that we are a leading producer of inert ingredients for the
agricultural industry, where our solvents and polymers are used for the
formulation of safer and more effective crop treatment products. For example,
our AGRIMER(Registered) line of specialty polymers are EPA-approved inert
ingredients which are used in seed-coating, crop dusting products and as binders
and disintegrants for a variety of pesticide tablets, pellets and granules.
 
     Our specialty polymers, marketed under the POLYCLAR(Registered) trade name,
serve the beverage market by assuring the clarity and extending the shelf life
of beer, wine and fruit juices.
 
     Performance Chemicals, Fine Chemicals and Industrial.  Our Performance
Chemicals business includes acetylene-based polymers, vinyl ether monomers and
advanced materials for industrial applications. Our acetylene-based chemistry
produces a number of performance polymers for use in a wide range of industrial
markets including:
 
          o coatings;
 
          o adhesives;
 
          o imaging;
 
          o detergents;
 
          o electronics; and
 
          o metalworking.
 
     Our advanced materials consist of high-purity carbonyl iron powders, sold
under the MICROPOWDER(Registered) name, for use in the aerospace, defense,
electronics and powder metallurgy industries.
 
     Our Fine Chemicals business focuses on the production of a variety of
highly specialized products sold to the pharmaceutical, biotechnology,
agricultural and imaging markets. We also offer custom manufacturing services
for these industries.
 
     We manufacture a broad range of fine chemicals under U.S. FDA current good
manufacturing practices (cGMP) at our Columbus, Ohio facility. These fine
chemicals include:
 
          o bulk pharmaceuticals, such as flunixin meglumine, a veterinary drug,
            and mitotane, a cancer treatment drug;
 
          o pharmaceutical intermediates, manufactured under contract for
            well-known pharmaceutical companies whose end products treat heart
            and kidney diseases, viral infections, and lower cholesterol; and
 
          o pheromones, for use in insect population measurement and control.
 
                                       3
<PAGE>
     We expanded our presence in the fine chemicals market in February 1998 with
the acquisition of a manufacturing facility in Freetown, Massachusetts from
Polaroid Corporation. We currently plan to expand the production capability at
this facility to include the manufacture of certain specialty chemical product
lines for our Personal Care business segment and to offer custom manufacturing
capability to the pharmaceutical, biotechnology, agricultural and chemical
process industries. As part of the acquisition, we entered into a multi-year
agreement to supply the imaging dyes and polymers used by Polaroid in its
instant film business.
 
     In our Industrial business, we market several intermediate and solvent
products, such as butanediol, tetrahydrofuran (THF) and N-methyl pyrrolidone
(NMP), for use in a variety of industries, including:
 
          o high performance plastics;
 
          o lubricating oil and chemical processing;
 
          o electronics cleaning; and
 
          o coatings.
 
     In addition, we offer a family of environmentally friendly products that
can replace chlorinated and other volatile solvents for a variety of industrial
uses, including cleaning, stripping and degreasing.
 
     Effective April 1, 1998, we acquired the remaining 50% interest in GAF-Huls
Chemie GmbH ("GhC"), our joint venture with a subsidiary of Huls AG, that is
based in Marl, Germany. As part of the transaction, we also acquired from Huls
the fully-dedicated, modern production facility that provides GhC with its
primary raw material, acetylene. We believe that the production costs for
butanediol and THF at GhC are among the most competitive in the industry. We
believe that this acquisition will contribute significantly toward our goal of
continued future access to a low-cost supply of butanediol.
 
     Based on a review of our entire butanediol manufacturing network, which
includes the Texas City, Texas; Calvert City, Kentucky; and Marl, Germany
plants, we announced in January 1999 that we intend to shut down the production
unit for butanediol at our Calvert City plant.
 
     Marketing and Sales.  We market our specialty chemicals using a worldwide
marketing and sales force, typically chemists or chemical engineers, who work
closely with our customers to familiarize themselves with our customers'
products, manufacturing processes and markets. We conduct our domestic marketing
and sales efforts from our facility in Wayne, New Jersey and regional offices
strategically located throughout the United States.
 
     International Operations.  We conduct our international operations through
39 subsidiaries and 42 sales offices located in Europe, Canada, Latin America
and the Asia-Pacific region. We also use the services of local distributors to
reach markets that might otherwise be unavailable to us.
 
     International sales of our specialty chemicals in 1998 were approximately
46% of our total sales for the year. Approximately 38% of our specialty
chemicals sales in 1998 were in Europe and Japan. Sales in these regions are
subject to exchange rate fluctuation risks. For a discussion of our policy
regarding the management of these risks, see Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Financial Condition." Other countries in which we have sales are subject to
additional risks, including high rates of inflation, exchange controls,
government expropriation and general instability.
 
     We own and operate GhC, primarily a butanediol manufacturing facility, and
ISP Acetylene GmbH, an acetylene production plant. Both production facilities
are located at Huls' Chemiepark site in Marl, Germany, and each relies upon Huls
to provide certain services, including utilities, rail transport and waste
handling. GhC is the most modern butanediol production facility in our
butanediol manufacturing network. ISP Acetylene, which employs electric arc
technology for the production of acetylene from various hydrocarbon feedstocks,
was built in 1992 to replace an older facility and utilizes state-of-the-art gas
separation technology. ISP Acetylene's entire production is dedicated to
fulfilling GhC's requirements and has no third-party sales.
 
                                       4
<PAGE>
     Raw Materials.  Because of the multi-step processes required to manufacture
our specialty chemicals, we believe that our raw materials costs represent a
smaller percentage of the cost of goods sold than for most other chemical
companies. We estimate that approximately one-third of our manufacturing costs
are for raw materials (including energy and packaging). As a result, we believe
that fluctuations in the price of raw materials have less of an impact on our
specialty chemicals business than on those chemical companies for which raw
materials costs represent a larger percentage of manufacturing costs.
 
     The principal raw materials used in the manufacture of our specialty
chemicals are acetylene, methanol and methylamine. Most of the raw materials for
consumption in the United States are obtained from third party sources pursuant
to supply agreements. Acetylene, a significant raw material used in the
production of most of our specialty chemicals, is obtained by us for domestic
use from two unaffiliated suppliers pursuant to supply contracts. At our Texas
City and Seadrift, Texas plants, acetylene is supplied via pipeline by a
neighboring large multinational company that generates this raw material as a
by-product from the manufacture of ethylene. At our Calvert City, Kentucky
facility, acetylene is supplied via pipeline by a neighboring company that
generates it from calcium carbide.
 
     Due to the nature of the manufacturing process, electricity and hydrocarbon
feedstocks (primarily butane) are critical raw materials for the production of
acetylene at our operations in Marl, Germany, where methanol is also a principal
raw material. Electricity, butane and methanol for Marl, Germany are supplied to
us by Huls pursuant to a long-term supply agreement.
 
     We believe that the diversity of our acetylene supply sources and our use
of a number of acetylene production technologies (ethylene by-product, calcium
carbide and electric arc technology) provide us with a reliable supply of
acetylene. In the event of a substantial interruption in the supply of acetylene
from current sources, or, in the case of GhC, electricity and hydrocarbon
feedstocks, we cannot assure that we would be able to obtain as much acetylene
from other sources as would be necessary to meet our supply requirements. To
date, we have not experienced an interruption of our acetylene supply that has
had a material adverse effect on our sales of specialty chemicals.
 
     Availability of other raw materials, including methanol and methylamine,
remained adequate during 1998. We believe that, in the event of a supply
interruption, we could obtain adequate supplies of such raw materials from
alternate sources.
 
     We use natural gas and raw materials derived from petroleum in many of our
manufacturing processes and, consequently, the price and availability of natural
gas and petroleum could be material to our operations. During 1998, crude oil
and natural gas supplies remained adequate, while prices generally demonstrated
seasonal variations.
 
MINERAL PRODUCTS
 
     Products and Markets.  We manufacture mineral products consisting of
ceramic-coated colored roofing granules, which are produced from rock deposits
that are mined and crushed at our quarries and are colored and coated using a
proprietary process. We sell our mineral roofing granules primarily to the North
American roofing industry for use in the manufacture of asphalt roofing
shingles. The granules help to provide weather resistance, decorative coloring,
heat deflection and increased weight in the shingle. We are the second largest
of only three major suppliers of colored roofing granules in North America.
 
     We estimate that more than 80% of the asphalt shingles currently produced
by the roofing industry are sold for the reroofing/replacement market, in which
demand is driven not by the pace of new home construction but by the needs of
homeowners to replace existing roofs. Homeowners generally replace their roofs
either because they are worn, thereby creating concerns as to weather-tightness,
or because of the homeowners' desire to upgrade the appearance of their homes.
We estimate that the balance of the roofing industry's asphalt shingle
production historically has been sold primarily for use in new housing
construction. Sales of our colored mineral granules have benefited from a trend
toward the increased use of heavyweight, three-dimensional laminated roofing
shingles which results in both functional and aesthetic improvements. These
shingles require, on average, approximately 60% more granules than traditional
three-tab, lightweight roofing shingles.
 
                                       5
<PAGE>
     Sales to Building Materials Corporation of America ("BMCA"), one of our
affiliates, and its subsidiaries constituted approximately 66% of our mineral
products net sales in 1998. See Item 13, "Certain Relationships and Related
Transactions" and Note 12 to Consolidated Financial Statements.
 
     Raw Materials.  We own rock deposits that have specific performance
characteristics, including weatherability, the ability to reflect UV light,
abrasion-resistance, non-staining characteristics and the ability to absorb
pigments. We own three quarries, each with proven reserves, based on current
production levels, of more than 20 years.
 
FILTER PRODUCTS
 
     We manufacture and sell filter products, consisting of pressure filter
vessels, filter bags and filter systems. These filter products are designed for
the removal of macroscopic contaminants in the treatment of process liquids. The
paint, automotive, chemical, pharmaceutical, petroleum and food and beverage
industries accounted for almost all of our 1998 net sales of filter products.
 
     We manufacture pressure filter vessels at manufacturing facilities in
Brazil, Canada and Germany, which serve both local and international markets. We
also manufacture filter bags in Belgium, Canada, Singapore, Brazil and the
United States and supply filter products worldwide through our subsidiaries,
sales offices and distributors.
 
COMPETITION
 
     We believe that we are either the first or second largest seller worldwide
of our specialty chemicals derived from acetylene, other than butanediol and
tetrahydrofuran.
 
     In each end-use market, there are a limited number of companies that
produce substitutable products for our acetylene-derived specialty chemicals.
These companies compete with us in the personal care, pharmaceutical, beverage
and industrial markets and have the effect of limiting our market penetration
and pricing flexibility. For our specialty chemicals not derived from acetylene,
including sunscreens, emollients, moisturizers and fine chemicals, a number of
world-wide competitors can provide similar products or services. We compete on
quality, price and customer service in these markets.
 
     Butanediol, which we produce primarily for use as a raw material, is also
manufactured by a limited number of companies throughout the world for both
their captive use or to supply the merchant market. We believe that there are
three competitors of significance for merchant market butanediol. One of these
competitors sources the merchant market from its plants in the United States and
Europe. The two other competitors each source the merchant market from their
single manufacturing plants, one in the United States and the other in Europe.
Recently, a fourth competitor announced its intention to enter the merchant
butanediol market and began construction of a plant in the United States.
Tetrahydrofuran is manufactured by a number of companies throughout the world.
 
     With regard to our mineral products, we have only one major and one smaller
competitor and believe that competition has been limited by:
 
          o the substantial capital expenditures associated with the
            construction of new mineral processing and coloring plants and the
            acquisition of suitable rock reserves;
 
          o the limited availability of proven rock sources;
 
          o the complexity associated with the construction of a mineral
            processing and coloring plant, together with the technical know-how
            required to operate such a plant;
 
          o the need to obtain, prior to commencing operations, reliable data
            over a substantial period of time regarding the weathering of
            granules in order to assure the quality and durability of the
            product; and
 
          o the difficulty in obtaining the necessary permits to mine and
            operate a quarry.
 
     With respect to filter products, we compete with a number of companies
worldwide.
 
                                       6
<PAGE>
     Competition is largely based upon product and service quality, technology,
distribution capability and price. We believe that we are well-positioned in the
marketplace as a result of our broad product lines, sophisticated technology and
worldwide distribution network.
 
RESEARCH AND DEVELOPMENT
 
     Our worldwide research and development expenditures were $25.4 million,
$27.3 million, and $26.3 million in 1996, 1997 and 1998, respectively.
 
     Our research and development activities are conducted primarily at our
worldwide technical center and laboratories in Wayne, New Jersey. Additional
research and development is conducted at plant sites in Calvert City, Kentucky;
Texas City, Texas; Chatham, New Jersey; Belleville, New Jersey; Freetown,
Massachusetts; and Columbus, Ohio and technical centers in the United Kingdom,
Belgium, Germany, China and Singapore. Our mineral products research and
development facility, together with our customer design and color center, is
located at Hagerstown, Maryland. Our filter products research and development is
conducted at our Belgium facility.
 
ENVIRONMENTAL SERVICES
 
     We have received site designation for the construction of a hazardous waste
treatment, storage and disposal facility at our Linden, New Jersey property and
have received approval from the New Jersey Turnpike Authority for a direct
access ramp from the New Jersey Turnpike to the site. If we are successful in
securing the necessary permits to construct and operate the hazardous waste
facility, we intend to develop and operate the facility in a separate
subsidiary, either on our own or in a joint venture with a suitable partner. We
estimate that the cost of constructing the facility will be approximately
$100 million and, if approved, the facility is anticipated to be in operation
three years after commencement of construction. We anticipate utilizing
internally generated cash and/or seeking project or other independent financing
for this project. We also are investigating additional development opportunities
at this site.
 
PATENTS AND TRADEMARKS
 
     As of December 31, 1998, we owned or licensed approximately 360 domestic
and 370 foreign patents or patent applications and owned or licensed
approximately 140 domestic and 1,390 foreign trademark registrations or
applications related to our business. While we believe the patent protection
covering certain of our products is material to those products, we do not
believe that any single patent, patent application or trademark is material to
our business or operations. We believe that the duration of the existing patents
and patent licenses is consistent wih our business needs.
 
ENVIRONMENTAL COMPLIANCE
 
     Since 1970, a wide variety of federal, state and local environmental laws
and regulations relating to environmental matters have been adopted and amended.
By reason of the nature of our operations and the operations of our predecessor
and certain of the substances that are or have been used, produced or discharged
at our or its plants or at other locations, we are affected by these
environmental laws and regulations. We have made capital expenditures of less
than $4.0 million in each of the three years ended December 31, 1998, in order
to comply with these laws and regulations. These expenditures are included in
additions to property, plant and equipment. We anticipate that aggregate capital
expenditures relating to environmental compliance in each of 1999 and 2000 will
be approximately $4.0 million.
 
     The environmental laws and regulations deal with air and water emissions or
discharges into the environment, as well as the generation, storage, treatment,
transportation and disposal of solid and hazardous waste, and the remediation of
any releases of hazardous substances and materials to the environment. We
believe that our manufacturing facilities comply in all material respects with
applicable environmental laws and regulations, and, while we cannot predict
whether more burdensome requirements will be adopted in the future, we believe
that any potential liability for compliance with environmental laws and
regulations will not materially affect our business, liquidity, results of
operations, cash flows or financial position.
 
                                       7
<PAGE>
     We believe that we operate our manufacturing facilities in compliance in
all material respects with applicable environmental, health and safety laws and
regulations, but we cannot predict whether more burdensome requirements will be
imposed by governmental authorities in the future.
 
EMPLOYEES
 
     At December 31, 1998, we employed approximately 2,900 people worldwide.
Approximately 750 employees in the United States were subject to five union
contracts. We believe that our relations with our employees and their unions are
satisfactory.
 
ITEM 2. PROPERTIES
 
     Our corporate headquarters and principal research and development
laboratories are located at a 100-acre campus-like office and research park
owned by one of our subsidiaries at 1361 Alps Road, Wayne, New Jersey 07470. The
premises are subject to a first mortgage.
 
     The principal domestic and foreign real properties either owned by, or
leased to, us are described below. Unless otherwise indicated, the properties
are owned in fee. In addition to the principal facilities listed below, we
maintain sales offices and warehouses in the United States and abroad,
substantially all of which are in leased premises under relatively short-term
leases.
 
<TABLE>
<CAPTION>
LOCATION                                   FACILITY                                  PRODUCT LINE
-----------------------------------------  -----------------------------------  -----------------------
                                           DOMESTIC
<S>                                        <C>                                  <C>
Alabama
  Huntsville.............................  Plant*                               Specialty Chemicals
Kentucky
  Calvert City...........................  Plant                                Specialty Chemicals
Maryland
  Hagerstown.............................  Research Center, Design Center,      Mineral Products
                                             Sales Office
Massachusetts
  Freetown...............................  Plant, Research Center               Specialty Chemicals
Missouri
  Annapolis..............................  Plant, Quarry                        Mineral Products
New Jersey
  Belleville.............................  Plant, Sales Office, Research        Specialty Chemicals
                                             Center, Warehouse
  Bridgewater............................  Sales Office                         Specialty Chemicals
  Chatham................................  Plant, Sales Office, Research        Specialty Chemicals
                                             Center
  Wayne..................................  Headquarters, Corporate              Specialty Chemicals
                                             Administrative Offices, Research
                                             Center
Ohio
  Columbus...............................  Plant, Research Center, Sales        Specialty Chemicals
                                             Office
Pennsylvania
  Blue Ridge Summit......................  Plant, Quarry                        Mineral Products
Tennessee
  Memphis................................  Plant*, Warehouse*, Distribution     Filter Products
                                             Center*
Texas
  Seadrift...............................  Plant                                Specialty Chemicals
  Texas City.............................  Plant                                Specialty Chemicals
Wisconsin
  Pembine................................  Plant, Quarry                        Mineral Products
</TABLE>
 
                                       8
<PAGE>
 
<TABLE>
<CAPTION>
LOCATION                                   FACILITY                                  PRODUCT LINE
-----------------------------------------  -----------------------------------  -----------------------
                                           INTERNATIONAL
<S>                                        <C>                                  <C>
Belgium
  Sint-Niklaas...........................  Plant, Sales Office, Research        Specialty Chemicals and
                                             Center, Distribution Center          Filter Products
Brazil
  Sao Paulo..............................  Plant*, Sales Office*, Distribution  Specialty Chemicals and
                                             Center*                              Filter Products
Canada
  Mississauga, Ontario...................  Sales Office*, Distribution Center*  Specialty Chemicals
  Oakville, Ontario......................  Plant*                               Filter Products
Germany
  Cologne................................  Research Center*, Sales Office*      Specialty Chemicals
  Hamburg................................  Plant*                               Filter Products
  Marl...................................  Plants**, Sales Office**             Specialty Chemicals
India
  Nagpur.................................  Plant**                              Specialty Chemicals
Japan
  Tokyo..................................  Sales Office*                        Specialty Chemicals and
                                                                                  Filter Products
Singapore................................  Plant*, Sales Office*, Distribution  Specialty Chemicals and
                                             Center*, Asia-Pacific                Filter Products
                                             Headquarters*, Warehouse*
United Kingdom
  Guildford..............................  European Headquarters*, Research     Specialty Chemicals
                                             Center*
  Manchester.............................  Sales Office**, Distribution         Specialty Chemicals and
                                             Center**                             Filter Products
</TABLE>
 
------------------
 
 * Leased property
 
** Long-term ground lease
 
     We believe that our plants and facilities, which are of varying ages and
are of different construction types, have been satisfactorily maintained, are in
good condition, are suitable for their respective operations and generally
provide sufficient capacity to meet production requirements. Each plant has
adequate transportation facilities for both raw materials and finished products.
In 1998, we made capital expenditures of $83.6 million relating to plant,
property and equipment.
 
ITEM 3. LEGAL PROCEEDINGS
 
     Our company, together with other companies, is a party to a variety of
proceedings and lawsuits involving environmental matters ("Environmental
Claims") under the Comprehensive Environmental Response Compensation and
Liability Act ("CERCLA") and similar state laws, in which recovery is sought for
the cost of cleanup of contaminated sites, a number of which are in the early
stages or have been dormant for protracted periods.
 
     We estimate that our liability in respect of all Environmental Claims
(including those relating to our closed Linden, New Jersey plant described
below), and certain other environmental compliance expenses, as of December 31,
1998, is $20.0 million, before reduction for insurance recoveries reflected on
our balance sheet (discussed below) of $10.7 million that relate to both past
expenses and estimated future liabilities ("estimated recoveries"). In the
opinion of management, the resolution of such matters should not be material to
our business, liquidity, results of operations, cash flows or financial
position. However, adverse decisions or events, particularly as to the liability
and the financial responsibility of our insurers and of the other parties
involved at each site and their insurers, could cause us to increase our
estimate of our liability in respect of such matters. It is not currently
possible to estimate the amount or range of any additional liability.
 
                                       9
<PAGE>
     After considering the relevant legal issues and other pertinent factors, we
believe that we will receive the estimated recoveries and that the recoveries
could be well in excess of the current estimated liability for all Environmental
Claims, although there can be no assurance in this regard. We believe we are
entitled to substantially full defense and indemnity under our insurance
policies for most Environmental Claims, although our insurers have not affirmed
a legal obligation under the policies to provide indemnity for such claims.
 
     In March 1995, GAF Corporation commenced litigation on behalf of itself and
its predecessors, successors, subsidiaries and related corporate entities in the
United States District Court for the District of New Jersey seeking amounts
substantially in excess of the estimated recoveries. The court dismissed the
action in December 1997 for lack of federal jurisdiction, and defendant insurers
appealed the dismissal. The appeal was denied by the Third Circuit Court of
Appeals in March 1999. In June 1997, GAF Corporation filed a similar action
against the insurers in the Superior Court of New Jersey, Somerset County, which
action is pending. While we believe that our claims are meritorious, we cannot
be certain that we will prevail in our efforts to obtain amounts equal to, or in
excess of, the estimated recoveries.
 
     In June 1989, we entered into a Consent Order with the New Jersey
Department of Environmental Protection ("NJDEP") requiring the development of a
remediation plan for our closed Linden, New Jersey plant and the maintenance of
financial assurances (currently $7.5 million) to guarantee our performance. This
Consent Order does not address any potential natural resource damage claims. In
April 1993, NJDEP issued orders which require the prevention of discharge of
contaminated groundwater and stormwater from the site and the elimination of
other potential exposure concerns. We believe, although we cannot be certain,
that, taking into account our plans for development of the site, we can comply
with the NJDEP order at a cost of no more than $7.5 million. See Item 1,
"Business--Environmental Services."
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
     None.
 
EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The following table sets forth the name, age, position and other
information with respect to ISP's executive officers. Under ISP's By-laws, each
director and executive officer continues in office until ISP's next annual
meeting of stockholders and until his or her successor is elected and qualified.
As used in this section, "ISP" refers to both Old ISP prior to the merger of Old
ISP into ISP Holdings and ISP subsequent to the merger.
 
<TABLE>
<CAPTION>
                                                                    PRESENT PRINCIPAL
                                                               OCCUPATION OR EMPLOYMENT AND
NAME AND POSITION HELD             AGE                         FIVE-YEAR EMPLOYMENT HISTORY
--------------------------------   ---   ------------------------------------------------------------------------
<S>                                <C>   <C>
Samuel J. Heyman ...............   60    Mr. Heyman has been a director, Chairman and Chief Executive Officer of
  Chairman and Chief Executive             ISP since its formation. Mr. Heyman also has been a director, Chairman
  Officer                                  and Chief Executive Officer of GAF Corporation and certain of its
                                           subsidiaries for more than five years. He has been a director and
                                           Chairman of BMCA since its formation, and was Chief Executive Officer
                                           of BMCA from June 1996 to January 1999. He is also the Chief Executive
                                           Officer, Manager and General Partner of a number of closely held real
                                           estate development companies and partnerships whose investments
                                           include commercial real estate and a portfolio of publicly traded
                                           securities.
 
Peter R. Heinze ................   56    Dr. Heinze has been a director, President and Chief Operating Officer of
  President and Chief Operating            ISP since November 1996. He was Senior Vice President, Chemicals of
  Officer                                  PPG Industries Inc., a glass products, coatings and resins, and
                                           chemical manufacturer from April 1993 to November 1996.
</TABLE>
 
                                       10
<PAGE>
<TABLE>
<CAPTION>
                                                                    PRESENT PRINCIPAL
                                                               OCCUPATION OR EMPLOYMENT AND
NAME AND POSITION HELD             AGE                         FIVE-YEAR EMPLOYMENT HISTORY
--------------------------------   ---   ------------------------------------------------------------------------
<S>                                <C>   <C>
Carl R. Eckardt ................   68    Mr. Eckardt has been a director of ISP since its formation and Executive
  Executive Vice President-                Vice President, Corporate Development, of ISP since November 1996,
  Corporate Development                    which position he also held from ISP's formation to January 1994. From
                                           January 1994 to November 1996, Mr. Eckardt was President and Chief
                                           Operating Officer of ISP. Mr. Eckardt was Vice Chairman of GAF
                                           Corporation from November 1996 to January 1999 and a director of GAF
                                           Corporation for more than five years until January 1999. He was
                                           Executive Vice President of GAF Corporation for more than five years
                                           until November 1996.

 
James P. Rogers ................   48    Mr. Rogers has been Executive Vice President-Finance of ISP since
  Executive Vice                           December 1996 and was Senior Vice President-Finance of ISP from
  President-Finance                        November 1993 to December 1996. He was Treasurer of ISP from March
                                           1992 to December 1994 and from September 1995 to December 1996.
                                           Mr. Rogers has been Executive Vice President and Chief Financial
                                           Officer of GAF Corporation and certain of its subsidiaries since
                                           December 1996, was Senior Vice President and Chief Financial Officer
                                           of such corporations from November 1993 to December 1996 and has
                                           served as Treasurer of such corporations since March 1992. Mr. Rogers
                                           has been a director of BMCA since its formation and Executive Vice
                                           President of BMCA since December 1996. He was Senior Vice President of
                                           such corporation from November 1993 to December 1996.
 
Andrew G. Mueller ..............   56    Mr. Mueller has been Executive Vice President-Operations of ISP since
  Executive Vice President-                May 1997. He was employed by BASF Corporation as Group Vice President,
  Operations                               Colorants & Textile/Leather Chemicals from December 1995 to April 1997
                                           and as Vice President, Fiber Intermediates for more than five years
                                           until November 1995.
 
Richard A. Weinberg ............   39    Mr. Weinberg has been Executive Vice President, Secretary and General
  Executive Vice President,                Counsel of ISP since May 1998 and was Senior Vice President, Secretary
  Secretary and General Counsel            and General Counsel of ISP from May 1996 to May 1998. Mr. Weinberg has
                                           held the same positions during the same time periods with GAF
                                           Corporation and certain of its subsidiaries, including BMCA. He was
                                           Vice President and General Counsel of BMCA from September 1994 to May
                                           1996, Vice President-Law of BMCA from May 1994 to September 1994 and
                                           Vice President-Law of GAF Building Materials Corporation from April
                                           1993 to May 1994.
 
Randall R. Lay .................   44    Mr. Lay has been Senior Vice President and Chief Financial Officer of
  Senior Vice President and                ISP since December 1998 and was Vice President and Chief Financial
  Chief Financial Officer                  Officer of ISP from April 1995 to December 1998. From August 1993 to
                                           April 1995, he served as Controller, Specialty Derivatives of ISP.
</TABLE>
 
                                       11
<PAGE>
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
     The following information pertains to ISP's common stock, which is traded
on the New York Stock Exchange. As of March 19, 1999, there were 240 holders of
record of ISP's outstanding common stock. For purposes of this section, "ISP"
refers to both Old ISP for the periods prior to the merger of Old ISP into ISP
Holdings and ISP for the periods subsequent to the merger.
 
<TABLE>
<CAPTION>
                                         1998 BY QUARTER                               1997 BY QUARTER
                            ------------------------------------------     ---------------------------------------
                            FIRST      SECOND       THIRD      FOURTH      FIRST      SECOND     THIRD      FOURTH
                            ------     -------     -------     -------     ------     ------     ------     ------
<S>                         <C>        <C>         <C>         <C>         <C>        <C>        <C>        <C>
Price Range of Common
  Stock:
  High..................    $18 1/2    $20 1/2     $18 13/16   $15 7/16    $13 3/4    $14 3/8    $15 1/4    $16 1/2
  Low...................     13 9/1     16 13/1     12           9 9/16     11 3/4     11 1/2     13 1/2     13 7/8
</TABLE>
 
     ISP announced in the second quarter of 1995 that its Board of Directors had
eliminated the 2 1/2 cents per share semi-annual dividend on ISP's common stock.
The declaration and payment of dividends is at the discretion of the Board of
Directors of ISP. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 9 to Consolidated Financial
Statements for information regarding restrictions on the payment of dividends
set forth on pages F-2 to F-10 and page F-26, respectively. Any decision to
resume the payment of dividends, and the timing and amount thereof, is dependent
upon, among other things, ISP's results of operations, financial condition, cash
requirements, prospects and other factors deemed relevant by the Board of
Directors. Accordingly, there can be no assurance that the Board of Directors
will resume the declaration and payment of dividends or as to the amount
thereof.
 
ITEM 6. SELECTED FINANCIAL DATA
 
     See page F-11.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
     See page F-2.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
     See Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Financial Condition--Market-Sensitive
Instruments and Risk Management" on page F-8.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     See Index on page F-1 and Financial Statements and Supplementary Data on
pages F-13 to F-42.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
     None.
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The information relating to the directors of ISP to be contained in the
Proxy Statement under the heading "Election of Directors" is incorporated by
reference herein. For information relating to the executive officers of ISP, see
"Executive Officers of the Registrant" in Part I of this report.
 
                                       12
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
 
     The information to be contained in the Proxy Statement under the headings
"Compensation of Executive Officers of the Company" and "Election of Directors"
is incorporated by reference herein.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The information to be contained in the Proxy Statement under the heading
"Security Ownership of Certain Beneficial Owners and Management" is incorporated
by reference herein.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     The information to be contained in the Proxy Statement under the headings
"Election of Directors" and "Certain Transactions" is incorporated by reference
herein.
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
     The following documents are filed as part of this report:
 
     (a)(1) Financial Statements: See Index on page F-1.
 
     (a)(2) Financial Statement Schedules: See Index on page F-1.
 
     (a)(3) Exhibits:
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                                 DESCRIPTIONS
------   ---------------------------------------------------------------------------------------------------------
<S>      <C>
  3.1    -- Amended and Restated Certificate of Incorporation of ISP (incorporated by reference to Exhibit 4.1 to
            Post-Effective Amendment No. 1 on Form S-8 to the Registration Statement on Form S-4 of ISP
            (Registration No. 333-53709) (the "ISP Registration Statement")).
 
  3.2    -- By-laws of ISP (incorporated by reference to Exhibit 99.2 to the ISP Registration Statement).
 
  4.1    -- 9% Note Indenture, dated as of October 18, 1996, between ISP Holdings and The Bank of New York, as
            trustee (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4 of ISP
            Holdings (Registration No. 333-17827) (the "Holdings Registration Statement")).
 
  4.2    -- 9 3/4% Note Indenture, dated as of October 18, 1996, between ISP Holdings and The Bank of New York, as
            trustee (incorporated by reference to Exhibit 4.2 to the Holdings Registration Statement).
 
 10.1    -- Amended and Restated Management Agreement, dated as of January 1, 1999, among GAF Corporation, G-I
            Holdings Inc., G Industries Corp., Merick Inc., GAF Fiberglass Corporation, ISP, GAF Building
            Materials Corporation, GAF Broadcasting Company, Inc., BMCA and ISP Opco Holdings Inc (incorporated by
            reference to Exhibit 10.1 to BMCA's Annual Report on Form 10-K for the year ended December 31, 1998).
 
 10.2    -- Indemnification Agreement, dated as of October 18, 1996, among GAF Corporation, G-I Holdings Inc., ISP
            Holdings, G Industries Corp. and GAF Fiberglass Corporation (incorporated by reference to
            Exhibit 10.7 to the Holdings Registration Statement).
 
 10.3    -- Tax Sharing Agreement, dated as of January 1, 1997, among ISP Holdings, International Specialty
            Products Inc. and certain subsidiaries of International Specialty Products Inc. (incorporated by
            reference to Exhibit 10.8 to the Holdings Registration Statement).
 
10 .4    -- Non-Qualified Retirement Plan Letter Agreement (incorporated by reference to Exhibit 10.11 to the
            Registration Statement on Form S-1 of International Specialty Products Inc. (Registration
            No. 33-40351)).*
</TABLE>
 
                                       13
<PAGE>
<TABLE>
<S>      <C>
 10.5    -- International Specialty Products Inc. 1991 Incentive Plan for Key Employees and Directors, as amended
            (incorporated by reference to Exhibit 4.3 to Post-Effective Amendment No. 1 on Form S-8 to the ISP
            Registration Statement).*
 
 10.6    -- Agreement, dated July 30, 1993, between International Specialty Products Inc. and Carl R. Eckardt
            (incorporated by reference to Exhibit 10.16 to the Registration Statement on Form S-4 of G-I Holdings
            Inc. (Registration No. 33-72220)).*
 
 10.7    -- Letter Agreement, dated October 15, 1996, between GAF Corporation and Dr. Peter Heinze (incorporated
            by reference to Exhibit 10.14 to the Holdings Registration Statement).*
 
 10.8    -- Letter Agreement, dated July 15, 1998, between ISP and Dr. Peter Heinze (incorporated by reference to
            Exhibit 4.3 to ISP's Registration Statement on Form S-8 (Registration No. 333-62359)).*
 
 10.9    -- Stock Appreciation Rights Agreement, dated January 20, 1994, between GAF Corporation and James P.
            Rogers (incorporated by reference to Exhibit 10.20 to G-I Holdings Annual Report on Form 10-K for the
            year ended December 31, 1993).*
 
 10.10   -- Compensation and Indemnification Agreement among Charles M. Diker, Burt Manning and ISP, dated
            October 10, 1997 (incorporated by reference to Exhibit 10.23 to the ISP Registration Statement).*
 
 10.11   -- Agreement and Plan of Merger between ISP Holdings and International Specialty Products Inc., dated as
            of March 30, 1998 (incorporated by reference to Exhibit A to Amendment No. 2 to ISP Holdings Schedule
            13D with respect to the common stock of International Specialty Products Inc. filed with the
            Securities and Exchange Commission on April 1, 1998).
 
 21      -- Subsidiaries of ISP.
 
 23      -- Consent of Arthur Andersen LLP.
 
 27      -- Financial Data Schedule for fiscal year 1998, which is submitted electronically to the Securities and
            Exchange Commission for information only.
</TABLE>
 
------------------
 * Management and/or compensation plan or arrangement.

     (b) Reports on Form 8-K
 
     No reports on Form 8-K were filed in the fourth quarter of 1998.
 
                                       14
<PAGE>
                                   SIGNATURES
 
     PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
 
                                           INTERNATIONAL SPECIALTY PRODUCTS INC.
 
                                         By:     /s/      RANDALL R. LAY
                                           ___________________________________
                                                     Randall R. Lay
                                             Senior Vice President and Chief
                                                    Financial Officer
 
Date: March 30, 1999
 
     PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW ON MARCH 30, 1999, BY THE FOLLOWING PERSONS ON
BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED.
 
<TABLE>
<CAPTION>
                SIGNATURE                                                  TITLE
------------------------------------------  --------------------------------------------------------------------
 
<S>                                         <C>
         /s/ SAMUEL J. HEYMAN               Chairman of the Board and Chief Executive Officer (Principal
------------------------------------------  Executive Officer)
Samuel J. Heyman
 
           /s/ PETER R. HEINZE              President and Chief Operating Officer; Director
------------------------------------------
Peter R. Heinze
 
          /s/ CARL R. ECKARDT               Executive Vice President, Corporate Development; Director
------------------------------------------
Carl R. Eckardt
 
         /s/ HARRISON J. GOLDIN             Director
------------------------------------------
Harrison J. Goldin
 
         /s/ CHARLES M. DIKER               Director
------------------------------------------
Charles M. Diker
 
          /s/ SANFORD KAPLAN                Director
------------------------------------------
Sanford Kaplan
 
           /s/ BURT MANNING                 Director
------------------------------------------
Burt Manning
 
          /s/ RANDALL R. LAY                Senior Vice President and Chief Financial Officer (Principal
------------------------------------------  Financial and Accounting Officer)
Randall R. Lay
</TABLE>
 
                                       15
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
                                   FORM 10-K
          INDEX TO MANAGEMENT'S DISCUSSION AND ANALYSIS, CONSOLIDATED
                       FINANCIAL STATEMENTS AND SCHEDULES
 
<TABLE>
<CAPTION>
                                                                                                              PAGE
                                                                                                              ----
 
<S>                                                                                                           <C>
Management's Discussion and Analysis of Financial Condition and Results of Operations......................   F-2
 
Selected Financial Data....................................................................................   F-11
 
Report of Independent Public Accountants...................................................................   F-12
 
Consolidated Statements of Income for the three years ended December 31, 1998..............................   F-13
 
Consolidated Balance Sheets as of December 31, 1997 and 1998...............................................   F-14
 
Consolidated Statements of Cash Flows for the three years ended December 31, 1998..........................   F-15
 
Consolidated Statements of Stockholders' Equity for the three years ended December 31, 1998................   F-17
 
Notes to Consolidated Financial Statements.................................................................   F-18
 
Supplementary Data (Unaudited):
  Quarterly Financial Data (Unaudited).....................................................................   F-42
 
                                                    SCHEDULES
 
Consolidated Financial Statement Schedules:
  Schedule II--Valuation and Qualifying Accounts...........................................................   S-1
</TABLE>
 
                                      F-1
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS
 
     On July 15, 1998, International Specialty Products Inc. ("Old ISP") merged
(the "Merger") with and into ISP Holdings Inc. ("ISP Holdings"). In connection
with the Merger, ISP Holdings changed its name to International Specialty
Products Inc. (the "Company"). In the Merger, each outstanding share of Old
ISP's common stock, other than those held by ISP Holdings, was converted into
one share of common stock of the Company, and the outstanding shares of ISP
Holdings' common stock were converted into an aggregate of 53,833,333 shares (or
approximately 78%) of the outstanding shares of common stock of the Company. The
financial statements presented herein for periods prior to the Merger represent
the results of the former ISP Holdings.
 
     Prior to January 1, 1997, ISP Holdings was a wholly-owned subsidiary of GAF
Corporation ("GAF"). On January 1, 1997, GAF effected a series of transactions
(the "Separation Transactions") that resulted in, among other things, the
capital stock of ISP Holdings being distributed to the stockholders of GAF. As a
result of such distribution, ISP Holdings and Old ISP are no longer direct or
indirect subsidiaries of GAF. Conversely, the assets and liabilities of the
other wholly-owned subsidiaries of GAF, including G-I Holdings Inc. ("G-I
Holdings") and its subsidiaries, including Building Materials Corporation of
America ("BMCA"), U.S. Intec, Inc. ("U.S. Intec"), and GAF Fiberglass
Corporation ("GFC"), are no longer included in the consolidated assets and
liabilities of the Company.
 
     Accordingly, the results of operations and assets and liabilities of G-I
Holdings, BMCA, U.S. Intec and GFC, as well as the assets of GAF Broadcasting
Company, Inc. (which were sold in August 1996), have been classified as
"Discontinued Operations" within the financial statements for all periods
presented prior to the Separation Transactions. The following discussion is on a
continuing operations basis.
 
RESULTS OF OPERATIONS
 
  1998 Compared With 1997
 
     The Company recorded net income in 1998 of $4.8 million ($.08 diluted
earnings per share) compared with net income of $54.0 million ($1.00 diluted
earnings per share) in 1997. The results for 1998 reflect a restructuring and
impairment loss of $73.0 million and $12.8 million of charges related to the
Merger. Excluding the effect of such nonrecurring charges, net income for 1998
was $64.1 million ($1.05 diluted earnings per share), with the increase
attributable to higher operating and other income, partially offset by higher
interest expense.
 
     Sales for 1998 were $823.9 million, a 10% increase compared with
$749.2 million for 1997. The sales growth in 1998 was primarily attributable to
the Company's acquisition, effective April 1, 1998, of the remaining 50%
interest in its joint venture with Huls AG, GAF Huls Chemie GmbH ("GhC"), and to
the acquisition of the Freetown fine chemicals facility (see Note 5 to
Consolidated Financial Statements), which together accounted for $74.5 million
of the increase. In addition, the sales increase was attributable to increased
sales volumes ($9.0 million), offset by the unfavorable effect ($9.8 million) of
the stronger U.S. dollar relative to other currencies in certain areas of the
world. The higher sales in 1998 reflect increased sales in the U.S., Europe (due
to the sales of GhC) and Latin America, partially offset by lower sales in the
Asia-Pacific region.
 
     As discussed in Note 3 to Consolidated Financial Statements, the Company
recorded $73.0 million in 1998 for provisions for restructuring and impairment
loss, primarily related to its decision to shut down its butanediol production
unit at its Calvert City, Kentucky manufacturing facility. As a result of
significant adverse changes in the butanediol market, and in conjunction with
the decision to shut down the Calvert City butanediol production unit, the
Company also reviewed the recoverability of its butanediol production assets at
its Texas City and Seadrift, Texas facilities and, based on this review, took an
impairment loss charge of $16.6 million. The total charge related to the above
shutdown and impairment aggregated $59.3 million, including a total write-off of
property, plant and equipment of $38.7 million, the write-off of $13.1 million
of goodwill related to the butanediol business and an accrual of $7.5 million
for cash costs to be incurred, mainly for decommissioning, demolition and
remediation, and severance costs. In addition, also as a result of the adverse
changes in the
 
                                      F-2
<PAGE>
butanediol market and as a result of the acquisition of GhC, the Company decided
not to continue its plans to acquire or develop a European manufacturing
facility. Costs incurred in previous years for this project aggregating
$10.7 million were therefore deemed not recoverable and were written off in
1998. Also, in the third quarter of 1998, the Company reserved $3.0 million for
the consolidation of offices in the Company's European operations.
 
     As a result of the Merger, the Company incurred $12.8 million of charges
against operating income in 1998, consisting of a $7.9 million charge in
connection with the termination of ISP Holdings' stock appreciation rights and
preferred stock option programs, a $2.6 million charge related to purchase
accounting adjustments and $2.2 million of other expenses relating to investment
banking, legal and other fees.
 
     Operating income, before the impact of the $85.8 million of nonrecurring
charges discussed above, was $155.6 million for 1998, a 10% increase over the
$141.3 million recorded in 1997. The improved results were primarily
attributable to higher operating income for the Performance Chemicals, Fine
Chemicals and Industrial business segment (up $22.8 million), mainly due to the
acquisitions of GhC and the Freetown fine chemicals facility, and also due to
higher operating income for Mineral Products (up $3.5 million), partially offset
by lower results for Personal Care (down $9.3 million) and Pharmaceutical,
Agricultural and Beverage (down $0.8 million). See below for further discussion
of business segment results. The overall operating results, in addition to the
favorable effect of the acquisitions, were favorably impacted by increased sales
volumes, partially offset by the adverse effect of the stronger U.S. dollar
($15.7 million) and 6.5% higher selling, general and administrative expenses due
primarily to higher distribution and marketing expenses. Selling, general and
administrative expenses as a percent of sales decreased from 21.1% in 1997 to
20.4% in 1998.
 
     Of the $14.3 million increase in operating income, excluding the
nonrecurring charges, domestic operating income increased by $4.1 million (12%)
due to increased sales volumes reflecting the acquisition of the Freetown fine
chemicals facility and higher Mineral Products sales and, to a lesser extent,
slightly higher gross margins. Operating income for Europe increased
$14.8 million due mainly to the GhC acquisition, partially offset by the effect
of the stronger U.S. dollar, while in the Asia-Pacific region, operating income
decreased by $6.5 million due to lower sales volumes. Operating income for the
Latin America region increased by $1.9 million (12.5%) due to increased sales
volumes and improved margins.
 
     Interest expense for 1998 was $75.6 million, a $2.0 million (3%) increase
over the $73.6 million recorded in 1997, with the increase due primarily to
higher average borrowings.
 
     Other income, net, comprises net investment income, foreign exchange
gains/losses resulting from the revaluation of foreign currency-denominated
accounts receivable and payable as a result of changes in exchange rates, and
other nonoperating and nonrecurring items of income and expense. Other income,
net, was $34.8 million in 1998 compared with $34.2 million in 1997, as
$1.8 million lower other nonoperating and nonrecurring expense items were
partially offset by $1.2 million lower net investment income.
 
  Business Segment Review
 
     A discussion of operating results for each of the Company's business
segments follows. The Company operates its Specialty Chemicals business through
three reportable business segments, in addition to the Mineral Products and
Filter Products segments. See Notes 13 and 14 to Consolidated Financial
Statements for additional business segment and geographic information.
 
  Personal Care
 
     The Personal Care segment provides products to the skin and hair care
markets. Sales in 1998 were $189.4 million compared with $187.4 million in 1997,
while operating income declined in 1998 to $34.7 million from $44.0 million in
1997. Sales volumes increased by $7.1 million in 1998, led by $4.0 million in
sales of new products. The stronger U.S. dollar adversely impacted sales by
$3.1 million and, in addition, the sunscreen market continued to experience
lower average price levels in some products which offset volume improvements.
 
     The decline in operating income in 1998 in the Personal Care segment was
attributable to a $4.7 million adverse impact of the stronger U.S. dollar,
unfavorable prices in skin care products, and $6.3 million higher selling,
general and administrative expenses. The latter was primarily the result of
increased expenses for new
 
                                      F-3
<PAGE>
product development, development and marketing expenses related to government
regulations to reduce the emission of volatile organic compounds (VOCs) in
hairsprays to 55% levels, and, to a lesser extent, higher distribution costs.
 
  Pharmaceutical, Agricultural and Beverage ("PAB")
 
     Sales for the PAB segment were $210.6 million in 1998 compared with
$208.4 million in 1997, while operating income decreased to $45.8 million in
1998 from $46.6 million in 1997. The increased sales reflected higher sales
volumes ($2.5 million) and favorable pricing, offset by the adverse impact of
the stronger U.S. dollar ($3.7 million). The same factors impacted PAB's
operating income, with the decline in operating income reflecting a
$6.2 million adverse impact of the stronger U.S. dollar, mostly offset by
favorable pricing and increased sales volumes and by lower selling and
distribution costs.
 
     The Pharmaceutical business registered another year of strong growth,
driven by the increased sales volumes in the oral care and excipients markets.
The effects of the economic slowdown in Asia were largely offset by higher sales
in Europe, and North and South America. The growth in the oral care market came
primarily through increased sales of the Gantrez(Registered) product line, which
has applications in both toothpaste and denture adhesives. In the excipients
market, increased revenues were generated through higher sales of
Plasdones(Registered), which are polymers used as a drug tablet binder. Sales
for 1998 in the antiseptic area were slightly down from 1997.
 
     In the Agricultural business, the effects of the economic turmoil in Asia
were disproportionate as customers in the region changed from preventive to
remedial action. This unfavorably impacted the sales of Biodone and butenediol
and the shortfalls could not be entirely offset in other parts of the world.
 
     In the Beverage business, the economic situation in Asia and in certain
parts of Eastern Europe had an unfavorable impact on sales, while sales in the
Latin America region continued to grow in 1998.
 
  Performance Chemicals, Fine Chemicals and Industrial
 
     The Performance Chemicals, Fine Chemicals and Industrial segment
experienced a 26% increase in sales in 1998, with sales increasing to
$290.1 million from $230.0 million in 1997. Operating income improved to
$54.7 million, a 71% increase over the $31.9 million recorded in 1997, excluding
the restructuring and impairment loss previously discussed related to the
butanediol business. The sales increase primarily reflected the acquisition of
the remaining 50% interest in GhC and the acquisition of the Freetown fine
chemicals facility (see Note 5 to Consolidated Financial Statements), which
together accounted for $74.5 million of the increase, and also reflected a
substantial increase in the sales of pharmaceutical intermediates. The results
for GhC are included in the Company's results on a consolidated basis from the
date of acquisition, including sales of $53.0 million for 1998. Sales for
Performance Chemicals in 1998 were 3% lower than in 1997 due to weak economies
in Asia and Eastern Europe. Pricing gains for Performance Chemicals were more
than offset by the adverse impact of the stronger U.S. dollar.
 
     The higher operating income for the Performance Chemicals, Fine Chemicals
and Industrial segment in 1998 was also primarily attributable to the
acquisitions of GhC and the Freetown facility and to the impact of sales volume
increases, partially offset by unfavorable pricing and lower Performance
Chemicals operating income due to adverse impact of the stronger U.S. dollar
and, to a lesser extent, unfavorable manufacturing costs.
 
  Mineral Products
 
     Sales for the Mineral Products segment in 1998 were $94.5 million, a 14%
increase compared with $83.1 million in 1997, while operating income improved
12% to $20.5 million in 1998 compared with $17.0 million in 1997. The sales
growth resulted from an $11.5 million increase in sales to an affiliate, BMCA
(see Note 12 to Consolidated Financial Statements), resulting principally from
higher volumes and slightly higher pricing. Sales to trade customers were flat
due to consolidation in the roofing industry and plant closures at certain of
the Company's trade customers. The Company also sold its tennis court materials
business in 1998.
 
     The improvement in operating income in 1998 resulted from the increased
sales volumes and cost containment controls, and, to a lesser extent, the profit
from the sale of the tennis court materials business.
 
                                      F-4
<PAGE>
  Filter Products
 
     Filter Products sales in 1998 were $39.3 million compared with
$40.3 million in 1997, with the decrease due to lower sales volumes and the
unfavorable effect of the stronger U.S. dollar. Operating income remained flat
at $3.6 million in each year.
 
1997 COMPARED WITH 1996
 
     The Company recorded income from continuing operations before extraordinary
loss in 1997 of $54.0 million ($1.00 diluted earnings per share) compared with
$60.8 million in 1996 ($1.13 diluted earnings per share). The lower results were
attributable to $35.3 million higher interest expense, offset by a $20.9 million
increase in other income and a $5.3 million increase in operating income.
 
     Sales for 1997 were $749.2 million, a 5% increase compared with
$716.5 million for 1996. The sales growth resulted from increased sales volumes
($62.4 million), partially offset by a $25.0 million unfavorable effect from the
stronger U.S. dollar, and primarily reflected sales increases in the Performance
Chemicals, Fine Chemicals and Industrial segment and the PAB segment. The sales
increase in 1997 reflected higher sales in the United States, the Asia-Pacific
region and Latin America, partially offset by lower sales in Europe due
primarily to the unfavorable effect of the stronger U.S. dollar.
 
     Operating income for 1997 increased by 4% to $141.3 million compared with
$136.0 million for 1996. The increase was primarily attributable to higher
operating income for the Performance Chemicals, Fine Chemicals and Industrial
segment, and the Filter Products and PAB segments, partially offset by lower
results for Personal Care. The higher consolidated operating income reflected
the overall higher sales levels, partially offset by lower consolidated gross
margins (down 0.5 percentage point) due to unfavorable pricing and the
unfavorable effect of the stronger U.S. dollar, and by higher operating expenses
which included a 7.5% increase in research and development spending.
 
     Of the $5.3 million increase in operating income in 1997, domestic
operating income increased by $13.8 million (21%), due to increased sales
volumes and improved margins. Operating income for Europe decreased by
$8.7 million (16%), primarily reflecting the effect of the stronger U.S dollar,
while in the Asia-Pacific region, operating income decreased by $1.2 million, as
higher sales levels were offset by lower gross margins due to unfavorable
pricing. Operating income from other foreign operations increased by
$1.4 million.
 
     Interest expense was $73.6 million in 1997 compared with $38.3 million in
1996. The increase was attributable to the issuance in October 1996 of
$325 million principal amount of 9% Senior Notes due 2003 and $199.9 million
principal amount of 9 3/4% Senior Notes due 2002.
 
     Other income, net, comprises net investment income, foreign exchange
gains/losses resulting from the revaluation of foreign currency-denominated
accounts receivable and payable as a result of changes in exchange rates, and
other nonoperating and nonrecurring items of income and expense. Other income,
net, was $34.2 million in 1997 compared with $13.3 million in 1996. The increase
in 1997 was due principally to $22.5 million higher net investment income.
 
  Business Segment Review
 
     Personal Care
 
     Sales for the Personal Care segment were $187.4 million in 1997 compared
with $190.7 million for 1996, while operating income decreased to $44.0 million
in 1997 from $47.6 million in 1996. The decline in sales resulted from the
unfavorable effect of the stronger U.S. dollar ($5.8 million) and unfavorable
pricing, which more than offset sales volume increases ($7.3 million). The skin
care product line recorded double-digit volume growth in 1997, mainly reflecting
increased sales of sunscreen and cosmetic preservative products, partially
offset by lower pricing for sunscreens. The hair care product line showed a 6%
decrease in sales for 1997.
 
     Operating income for the Personal Care segment decreased by 8% in 1997
compared with 1996 as a result of the unfavorable pricing, the adverse impact of
the stronger U.S. dollar and increased marketing expenses, partially offset by
the increased sales volumes.
 
                                      F-5
<PAGE>
     Pharmaceutical, Agricultural and Beverage
 
     Sales for the PAB segment were $208.4 million in 1997, a 7% increase
compared with $194.9 million for 1996, while operating income increased 4.5% to
$46.6 million in 1997 compared with $44.6 million in 1996. Sales and operating
income increases in 1997 each resulted from significant sales volume increases,
partially offset by the unfavorable effect of the stronger U.S. dollar.
 
     In the Pharmaceutical business, the Company registered a strong performance
in 1997, highlighted by substantial sales growth in the oral care and excipients
markets. Sales of oral care polymers benefited from the U.S. rollout of
Colgate's Total(Trademark) toothpaste, the first toothpaste approved by the FDA
to prevent gingivitis, plaque and cavities, and which contains one of the
Company's Gantrez(Registered) polymers. Sales of the Company's beverage
additives, consisting of the Polyclar(Registered) line of products, experienced
good growth in the Latin America region, where sales increased more than 20%,
and in the Asia-Pacific region.
 
     Performance Chemicals, Fine Chemicals and Industrial
 
     Sales for the Performance Chemicals, Fine Chemicals and Industrial segment
increased by 12% to $230.0 million in 1997 compared with $205.7 million in 1996.
The sales growth was driven by a 74% increase in Fine Chemicals sales, mainly
from new pharmaceutical products and an agricultural herbicide. Sales of
Performance Chemicals increased by 22% in 1997 due to adoption of ISP polymers
into Dye Transfer Inhibitor (DTI) applications and continued growth in the
Digital Printing and Imaging Market. In addition, the Company's sales to the
household, institutional and industrial cleaning markets, in which the Company's
PVP polymers find application, increased by 30% in 1997 as a result of increased
geographic penetration and new product applications. Sales for the Industrial
business increased by 2% in 1997, reflecting increased sales volumes partially
offset by the adverse effect of the stronger U.S. dollar and unfavorable
pricing. The Industrial business benefited in 1997 from the continued growth of
a number of its end-use markets. Butanediol sales increased primarily as a
result of higher demand from plastics manufacturers serving the automotive
industry.
 
     Operating income for the Performance Chemicals, Fine Chemicals and
Industrial segment improved by 18% to $31.9 million in 1997 from $27.1 million
in 1996. This improvement was attributable mainly to the Fine Chemicals business
as a result of a favorable sales mix where higher-margin products were sold,
coupled with favorable plant efficiencies in machine utilization and yields.
Operating income in the Performance Chemicals business increased by 36%,
reflecting the sales increases, partially offset by lower gross margins as a
result of unfavorable pricing and the unfavorable effect of the stronger U.S.
dollar. Operating income for the Industrial business decreased in 1997 as a
result of unfavorable gross profit margins driven by the unfavorable pricing and
adverse foreign exchange impact.
 
     Mineral Products
 
     Sales for the Mineral Products segment decreased by $2.5 million in 1997 to
$83.1 million compared with $85.6 million in 1996. The decrease in sales was
mainly attributable to lower sales volumes to both BMCA and trade customers,
partially offset by favorable pricing.
 
     Despite lower sales levels, operating income for Mineral Products increased
by $0.5 million in 1997 to $17.0 million due to higher gross margins (up 1.4
percentage points) as a result of improved pricing, and lower operating
expenses.
 
     Filter Products
 
     Sales for the Filter Products segment were $40.3 million in 1997 compared
with $39.6 million in 1996, with the increase attributable to both improved
pricing and sales volume increases, mostly offset by the unfavorable effect of
the stronger U.S. dollar. Operating income in 1997 increased to $3.6 million
from $0.2 million in 1996. The improvement in 1997 reflected higher sales levels
and higher gross margins (up 6.2 percentage points) due mainly to favorable
pricing.
 
                                      F-6
<PAGE>
LIQUIDITY AND FINANCIAL CONDITION
 
     During 1998, the Company's net cash outflow before financing activities was
$137.6 million, including $186.8 million of cash generated from operations, the
reinvestment of $166.0 million for capital programs and acquisitions (see below
and Note 5 to Consolidated Financial Statements), $56.1 million of cash
generated from a sale-leaseback related to an acquisition, and the use of
$216.8 million of cash for net purchases of available-for-sale and
held-to-maturity securities and other short-term investments.
 
     Cash from operations reflected a $49.0 million cash inflow from net sales
of trading securities and also included $8.1 million of dividends received from
the GhC joint venture prior to the Company's acquisition of the remaining
interest in GhC. Working capital increased by $5.3 million, primarily reflecting
an $11.9 million increase in inventories due to increased sales requirements as
a result of the acquisitions made in 1998, partially offset by a $2.2 million
increase in payables and accrued liabilities and a decrease of $2.6 million in
receivables.
 
     Net cash provided by financing activities in 1998 totaled $141.7 million,
mainly reflecting a $97.6 million increase in borrowings under the Company's
bank revolving credit facility, $48.9 million additional short-term borrowings,
and $4.0 million proceeds from the sale of the Company's accounts receivable,
partially offset by $9.3 million of repurchases of common stock pursuant to the
Company's repurchase program. The Company announced in September 1998 that its
Board of Directors had approved the repurchase of one million shares of its
common stock and announced in March 1999 the approval of the repurchase of an
additional 1.5 million shares. The repurchased shares will be held for general
purposes, including the issuance of shares under the Company's stock option
plan.
 
     As a result of the foregoing factors, cash and cash equivalents increased
by $4.1 million during 1998 to $24.6 million, excluding $355.0 million of
trading, available-for-sale and held-to-maturity securities and other short-term
investments.
 
     As of December 31, 1998, the Company's current maturities of long-term
debt, scheduled to be repaid during 1999, totaled $0.6 million, excluding
$200 million relating to the Company's 9% Senior Notes due March 1999. The
Company repaid the 9% Senior Notes on March 1, 1999 with long-term Credit
Agreement (defined below) borrowings. In addition, the Company has received a
one-year extension, to April 11, 2000, on the $38.1 million mortgage obligation
on its headquarters property. Accordingly, the 9% Senior Notes and the mortgage
obligation are classified as long-term debt on the Consolidated Balance Sheet.
 
     In July 1996, the Company entered into a new five-year revolving credit
facility (the "Credit Agreement") with a group of banks, which provides for
loans of up to $400 million and letters of credit of up to $75 million (see
Note 9 to Consolidated Financial Statements). As of December 31, 1998, loans in
the amount of $132.6 million and letters of credit in the amount of
$7.9 million were outstanding under the Credit Agreement.
 
     Borrowings by the Company, including those under the Credit Agreement, are
subject to the application of certain financial covenants contained in such
agreement and in the indentures relating to the 9% Senior Notes due 2003 and
9 3/4% Senior Notes due 2002 (collectively, the "Notes"). As of December 31,
1998, the Company was in compliance with such covenants, and the application of
such covenants would not have restricted the amount available for borrowing
under the Credit Agreement. The Credit Agreement and the indentures relating to
the Notes limit the amount of cash dividends, purchases of treasury stock, and
other restricted payments (as defined) by the Company. See Note 9 to
Consolidated Financial Statements.
 
     In February 1998, the Company acquired Polaroid Corporation's Freetown,
Massachusetts fine chemicals facility. In connection with the acquisition, the
Company entered into a sale-leaseback arrangement for the facility's equipment
with a third party. The lease has been accounted for as an operating lease, with
an initial term of four years and, at the Company's option, up to three one-year
renewal periods. As part of the acquisition transaction, the Company entered
into a long-term supply and license agreement with Polaroid for the imaging
chemicals and polymers manufactured at the facility and used by Polaroid in its
instant film business.
 
     Effective April 1, 1998, the Company acquired the remaining 50% interest in
the GhC joint venture. As part of the transaction, the Company also acquired
Hul's production facility that supplies GhC with its primary raw material,
acetylene. See Note 5 to Consolidated Financial Statements.
 
                                      F-7
<PAGE>
     On July 22, 1998, the Company filed a shelf Registration Statement on Form
S-3 with the U.S. Securities and Exchange Commission for $1 billion of debt and
equity securities. In addition to debt refinancing, the net proceeds of any
offering, if consummated, are expected to be used for general corporate
purposes.
 
     For information with respect to income taxes, see Note 4 to Consolidated
Financial Statements.
 
     Effective January 1, 1999, member states of the European Union converted to
a common currency, the euro. The Company does not expect this conversion to have
a material impact on its business, results of operations or financial condition.
The Company is currently billing customers in euro if they so request, and this
has not had an impact on the Company's administrative systems.
 
     The Company does not believe that inflation has had an effect on its
results of operations during the past three years. However, there can be no
assurance that the Company's business will not be affected by inflation in the
future.
 
     The Company has received site designation from the New Jersey Hazardous
Waste Facilities Siting Commission for the construction of a hazardous waste
treatment, storage and disposal facility at its Linden, New Jersey property and
has received approval from the New Jersey Turnpike Authority for a direct access
ramp from the Turnpike to the site. If the Company is successful in securing the
necessary permits to construct and operate the hazardous waste facility, the
Company intends to develop and operate the facility in a separate subsidiary,
either on its own or in a joint venture with a suitable partner. The Company
estimates that the cost of constructing the facility will be approximately
$100 million and, if approved, the facility is anticipated to be in operation
three years after commencement of construction. The Company anticipates
utilizing internally generated cash and/or seeking project or other independent
financing for this project. Accordingly, the Company would not expect such
facility to impact materially its liquidity or capital resources. The Company is
also investigating additional development opportunities at this site.
 
     The Company, together with other companies, is a party to a variety of
proceedings and lawsuits involving environmental matters. See Note 16 to
Consolidated Financial Statements for further information.
 
  Market-Sensitive Instruments and Risk Management
 
     The Company's investment strategy is to seek returns in excess of money
market rates on its available cash while minimizing market risks. There can be
no assurance that the Company will be successful in implementing such a
strategy. The Company invests primarily in international and domestic arbitrage
and securities of companies involved in acquisition or reorganization
transactions, including at times, common stock short positions which are offsets
against long positions in securities which are expected, under certain
circumstances, to be exchanged or converted into the short positions. With
respect to its equity positions, the Company is exposed to the risk of market
loss. See Note 2 to Consolidated Financial Statements.
 
     The Company enters into financial instruments in the ordinary course of
business in order to manage its exposure to market fluctuations in interest
rates, foreign currency rates, and on its short-term investments. The financial
instruments the Company employs to reduce market risk include swaps, futures,
forwards, and other hedging instruments. The financial instruments are subject
to strict internal controls and their use is primarily confined to the hedging
of the Company's debt, foreign currency exposure, and short-term investment
portfolio. The counterparties to these financial instruments are major financial
institutions with high credit standings. The amounts subject to credit risk are
generally limited to the amounts, if any, by which the counterparties'
obligations exceed the obligations of the Company. The Company controls credit
risk through credit approvals,
 
                                      F-8
<PAGE>
limits and monitoring procedures. The Company does not anticipate nonperformance
by counterparties to these instruments.
 
<TABLE>
<CAPTION>
                                                                                 DECEMBER 31,
                                                                                     1997           DECEMBER 31, 1998
                                                                               -----------------    ------------------
                                                                               NOTIONAL    FAIR     NOTIONAL     FAIR
                                                                               AMOUNT      VALUE    AMOUNT      VALUE
                                                                               --------    -----    --------    ------
                                                                                             (MILLIONS)
<S>                                                                            <C>         <C>      <C>         <C>
Interest rate financial instruments.........................................    $300.0     $(3.3)    $425.0     $(10.2)
Foreign currency financial instruments......................................    $151.6     $ 1.4     $ 90.8     $ (4.4)
Equity-related financial instruments........................................    $   --     $  --     $332.8     $    0
</TABLE>
 
     All of the financial instruments in the above table have a maturity of less
than one year, except that $100 million notional amount of interest rate swap
agreements, with a fair value of ($4.3) million as of December 31, 1998, mature
in 2002.
 
     The objectives of the Company in utilizing interest rate swap agreements
are to lower funding costs, diversify sources of funding and manage interest
rate exposure. As of December 31, 1998, the Company had entered into interest
rate swap agreements with a notional value of $225 million in order to convert
$225 million of its exposure to floating interest rates to fixed rates. The
Company had also entered into interest rate swap agreements with a notional
value of $200 million in order to convert the fixed rate being paid on its
$200 million 9% Senior Notes due 1999 into floating rates. The 9% Senior Notes,
the $200 million notional value of fixed to floating interest rate swaps, and
$125 million notional amount of floating to fixed interest rate swaps matured on
March 1, 1999. By utilizing interest rate swap agreements, the Company reduced
its interest expense by $2.8, $2.1 and $1.7 million in 1996, 1997 and 1998,
respectively.
 
     The Company enters into forward foreign exchange instruments with
off-balance-sheet risk in order to hedge a portion of both its borrowings
denominated in foreign currency and its firm or anticipated purchase commitments
related to the operations of its foreign subsidiaries. Forward contract
agreements require the Company and the counterparty to exchange fixed amounts of
U.S. dollars for fixed amounts of foreign currency on specified dates. All
forward contracts are in major currencies with highly liquid markets and mature
within one year. Hedging strategies are approved by senior management before
they are implemented. The Company does not expect the conversion to the euro
currency by member states of the European Union to have a material impact on its
use of financial instruments.
 
     As of December 31, 1997 and 1998, the U.S. dollar equivalent fair value of
outstanding forward foreign exchange contracts was $151.6 and $90.8 million,
respectively. The U.S. dollar equivalent fair value of foreign exchange
contracts outstanding as of December 31, 1997 and 1998 entered into as a hedge
of non-local currency intercompany loans was $24.9 and $18.4 million,
respectively, representing 100% of the Company's foreign currency exposure with
respect to such loans.
 
     As of December 31, 1998, equity-related financial instruments employed by
the Company to reduce market risk include long contracts valued at
$56.1 million and short contracts valued at $276.7 million, which are
marked-to-market each month, with unrealized gains and losses included in the
results of operations. As such, there is no economic cost at December 31, 1998
to terminate these instruments and therefore the fair market value is zero.
 
  Year 2000 Compliance
 
     The Company has implemented a formal Year 2000 program (the "Year 2000
Program") to (i) address the inability of some of its information technology
("IT") and "non-IT" equipment that the Company believes is significant to its
business, including certain devices with embedded technology, to accurately read
and process certain dates, including dates in the Year 2000 and afterwards (the
"Year 2000 Issues"); (ii) investigate Year 2000 Issues of third parties
significant to the Company's business; and (iii) establish contingency plans
where appropriate.
 
     The Company has completed the installation of a new Enterprise Resource
Planning System ("ERP System") and has replaced or remediated most of its
personal computers and other IT equipment that may have
 
                                      F-9
<PAGE>
Year 2000 Issues. Although the ERP System was implemented for purposes other
than remediating Year 2000 Issues, management believes that the ERP System is
Year 2000 compliant. In this regard, the Company has performed Year 2000 testing
of the ERP system and did not discover any major Year 2000 Issues. With respect
to its non-IT equipment, the Company and its consultants are presently
inventorying, evaluating, remediating and testing this equipment. The Company
expects to complete its Year 2000 Program for IT and non-IT equipment by
mid-1999.
 
     The Company is also requesting information on the Year 2000 Issues of third
parties significant to the Company's business. The Company is evaluating the
responses from many of these entities and is requesting more information as
appropriate. Based on the information gathered from its Year 2000 Program, the
Company is developing contingency plans to minimize the impact of Year 2000
Issues on its business. The Company expects to substantially complete these
activities by mid-1999.
 
     The Company does not believe that the costs of its Year 2000 Program will
be material to its financial position or results of operations. While the
Company believes that it addressed most of its IT Year 2000 Issues by installing
the ERP System and replacing or remediating personal computers, neither the
timing nor extent of these activities were directly related to the Company's
Year 2000 Program. The Company also has incurred outside costs of approximately
$100,000 in connection with evaluating Year 2000 compliance of its non-IT
systems. The Company anticipates that additional costs to remediate should
approximate no more than $1.5 million in the aggregate. The Company expects that
the source of any funds that may be necessary to pay the costs of addressing its
Year 2000 Issues will be provided from cash balances or cash generated from
operations. The Company intends to charge such costs against earnings as the
costs are incurred.
 
     Management believes that it has taken reasonable steps in developing its
Year 2000 Program. Notwithstanding these actions, there can be no assurance that
all of the Company's Year 2000 Issues or those of its key suppliers, service
providers or customers will be resolved or addressed satisfactorily before the
Year 2000 commences. Management believes that the reasonably likely "worst case
scenario" resulting from Year 2000 Issues could be the failure by the Company's
key suppliers, service providers, customers and other third parties to address
their Year 2000 Issues. If this were to occur, and there were no alternatives
available to the Company, then the Company's usual channels of supply and
distribution could be disrupted, in which event the Company could experience a
material adverse impact on its business, results of operations or financial
position.
 
                                    *  *  *
 
FORWARD-LOOKING STATEMENTS
 
     This Annual Report on Form 10-K contains both historical and
forward-looking statements. All statements other than statements of historical
fact are, or may be deemed to be, forward-looking statements within the meaning
of section 27A of the Securities Act of 1933 and section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are only predictions and
generally can be identified by use of statements that include phrases such as
"believe," "expect," "anticipate," "intend," "plan," "foresee" or other words or
phrases of similar import. Similarly, statements that describe the Company's
objectives, plans or goals also are forward-looking statements. The Company's
operations are subject to certain risks and uncertainties that could cause
actual results to differ materially from those contemplated by the relevant
forward-looking statement. The forward-looking statements included herein are
made only as of the date of this Annual Report on Form 10-K and the Company
undertakes no obligation to publicly update such forward-looking statements to
reflect subsequent events or circumstances. No assurances can be given that
projected results or events will be achieved.
 
                                      F-10
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
                            SELECTED FINANCIAL DATA
 
     Set forth below are selected consolidated financial data of International
Specialty Products Inc. (the "Company"), formerly ISP Holdings Inc. ("ISP
Holdings"), and its subsidiaries. On July 15, 1998, International Specialty
Products Inc. ("Old ISP") merged (the "Merger") with and into ISP Holdings. In
connection with the Merger, ISP Holdings changed its name to International
Specialty Products Inc. The financial information presented herein for periods
prior to the Merger of Old ISP and ISP Holdings represent the results of the
former ISP Holdings. Prior to January 1, 1997, ISP Holdings was a wholly-owned
subsidiary of GAF Corporation ("GAF"). On January 1, 1997, GAF effected the
Separation Transactions that resulted in, among other things, the capital stock
of ISP Holdings being distributed to the stockholders of GAF. As a result of the
Separation Transactions, ISP ceased to be a direct or indirect subsidiary of
GAF, and GAF's subsidiaries are no longer included in the consolidated assets
and liabilities of ISP. See Note 1 to Consolidated Financial Statements. The
results of operations and assets and liabilities of GAF's subsidiaries, as well
as GAF Broadcasting Company, Inc. (whose assets were sold in August 1996), have
been classified as "Discontinued Operations" within the Consolidated Financial
Statements for all periods presented prior to the Separation Transactions.
<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                             --------------------------------------------------------------------
                                                 1994          1995          1996          1997          1998
                                             ------------  ------------  ------------  ------------  ------------
                                                       (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                          <C>           <C>           <C>           <C>           <C>
Operating Data:
  Net sales................................  $    600,047  $    689,002  $    716,481  $    749,208  $    823,938
  Gross profit.............................       232,301       274,330       297,560       312,328       338,568
  Operating income.........................        99,245       127,096       136,024       141,304        69,755
  Interest expense.........................        28,676        33,091        38,333        73,612        75,590
  Income from continuing operations before
     income taxes and extraordinary
     losses................................        72,484       106,102       116,628       107,834        30,416
  Income from continuing operations before
     extraordinary losses..................        37,112        55,069        60,836        54,005         4,812
  Net income...............................        28,010        32,828        53,933        54,005         4,812
  Income from continuing operations per
     common share:
  Basic....................................  $        .69  $       1.02  $       1.13  $       1.00  $        .08
  Diluted..................................  $        .69  $       1.02  $       1.13  $       1.00  $        .08
Other Data:
  Gross profit margin......................          38.7%         39.8%         41.5%         41.7%         41.1%
  Operating margin.........................          16.5%         18.4%         19.0%         18.9%          8.5%
  Depreciation.............................  $     32,753  $     35,960  $     38,279  $     41,877  $     50,063
  Goodwill amortization....................        13,400        13,223        13,200        13,294        15,025
  Capital expenditures and
     acquisitions..........................        31,098        38,934        54,587        68,655       166,040
 
<CAPTION>
 
                                                                         DECEMBER 31,
                                             --------------------------------------------------------------------
                                                 1994          1995          1996          1997          1998
                                             ------------  ------------  ------------  ------------  ------------
                                                                         (THOUSANDS)
<S>                                          <C>           <C>           <C>           <C>           <C>
Balance Sheet Data:
  Total working capital....................  $    228,040  $    290,001  $    476,846  $    322,080  $    406,654
  Total assets.............................     1,357,541     1,460,389     1,600,432     1,485,680     1,765,623
  Long-term debt less current maturities...       285,397       280,254       834,284       798,762       896,095
  Stockholders' equity (deficit)...........       (15,791)       (1,707)       42,653       261,841       501,723
</TABLE>
 
                                      F-11
<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To International Specialty Products Inc.:
 
     We have audited the accompanying consolidated balance sheets of
International Specialty Products Inc. (a Delaware corporation) and subsidiaries
as of December 31, 1997 and 1998, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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 financial statements referred to above, appearing on
pages F-13 to F-41 of this Form 10-K, present fairly, in all material respects,
the financial position of International Specialty Products Inc. and subsidiaries
as of December 31, 1997 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
 
     Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule appearing on page S-1 of
this Form 10-K is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
 
                                          ARTHUR ANDERSEN LLP
 
Roseland, New Jersey
February 24, 1999
 
                                      F-12
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
                       CONSOLIDATED STATEMENTS OF INCOME
 
<TABLE>
<CAPTION>
                                                                                 YEAR ENDED DECEMBER 31,
                                                                            ----------------------------------
                                                                               1996        1997        1998
                                                                            ----------  ----------  ----------
                                                                               (THOUSANDS, EXCEPT PER SHARE
                                                                                         AMOUNTS)
<S>                                                                         <C>         <C>         <C>
Net sales.................................................................  $  716,481  $  749,208  $  823,938
                                                                            ----------  ----------  ----------
Costs and expenses:
  Cost of products sold...................................................     418,921     436,880     485,370
  Selling, general and administrative.....................................     148,336     157,730     167,953
  Provision for restructuring and impairment loss.........................          --          --      73,049
  Merger-related expenses.................................................          --          --      12,786
  Goodwill amortization...................................................      13,200      13,294      15,025
                                                                            ----------  ----------  ----------
     Total costs and expenses.............................................     580,457     607,904     754,183
                                                                            ----------  ----------  ----------
Operating income..........................................................     136,024     141,304      69,755
Interest expense..........................................................     (38,333)    (73,612)    (75,590)
Equity in earnings of joint venture.......................................       5,604       5,909       1,455
Other income, net.........................................................      13,333      34,233      34,796
                                                                            ----------  ----------  ----------
Income from continuing operations before income taxes and extraordinary
  loss....................................................................     116,628     107,834      30,416
Income taxes..............................................................     (42,079)    (39,137)    (15,325)
Minority interest in income of subsidiary.................................     (13,713)    (14,692)    (10,279)
                                                                            ----------  ----------  ----------
Income from continuing operations before extraordinary loss...............      60,836      54,005       4,812
                                                                            ----------  ----------  ----------
Discontinued operations:
  Loss from discontinued operations, net of income taxes..................     (19,590)         --          --
  Gain on sale of discontinued operation, net of income taxes of
     $30,648..............................................................      43,637          --          --
                                                                            ----------  ----------  ----------
Income from discontinued operations.......................................      24,047          --          --
                                                                            ----------  ----------  ----------
Income before extraordinary loss..........................................      84,883      54,005       4,812
Extraordinary loss, net of income tax benefits of $17,275.................     (30,950)         --          --
                                                                            ----------  ----------  ----------
Net income................................................................  $   53,933  $   54,005  $    4,812
                                                                            ----------  ----------  ----------
                                                                            ----------  ----------  ----------
Earnings per common share:
  Basic:
     Income from continuing operations....................................  $     1.13  $     1.00  $      .08
     Income from discontinued operations..................................         .45          --          --
     Extraordinary loss...................................................        (.58)         --          --
                                                                            ----------  ----------  ----------
     Net income...........................................................  $     1.00  $     1.00  $      .08
                                                                            ----------  ----------  ----------
                                                                            ----------  ----------  ----------
  Diluted:
     Income from continuing operations....................................  $     1.13  $     1.00  $      .08
     Income from discontinued operations..................................         .45          --          --
     Extraordinary loss...................................................        (.58)         --          --
                                                                            ----------  ----------  ----------
     Net income...........................................................  $     1.00  $     1.00  $      .08
                                                                            ----------  ----------  ----------
                                                                            ----------  ----------  ----------
Weighted average number of common and common equivalent shares
  outstanding:
  Basic...................................................................      53,833      53,833      60,971
                                                                            ----------  ----------  ----------
                                                                            ----------  ----------  ----------
  Diluted.................................................................      53,833      53,833      61,278
                                                                            ----------  ----------  ----------
                                                                            ----------  ----------  ----------
</TABLE>
 
The accompanying Notes to Consolidated Financial Statements are an integral part
                              of these statements.
                                      F-13
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                                               DECEMBER 31,
                                                                                         ------------------------
                                                                                            1997          1998
                                                                                         ----------    ----------
                                                                                               (THOUSANDS)
<S>                                                                                      <C>           <C>
                                        ASSETS
Current Assets:
  Cash and cash equivalents...........................................................   $   20,495    $   24,638
  Investments in trading securities...................................................       67,493        67,333
  Investments in available-for-sale securities........................................      140,812       233,625
  Investments in held-to-maturity securities..........................................          311        12,287
  Other short-term investments........................................................       26,682        41,708
  Accounts receivable, trade, less reserve of $2,724 and $2,789.......................       67,077        82,227
  Accounts receivable, other..........................................................       25,288        21,748
  Receivable from related parties, net................................................        4,124         7,769
  Inventories.........................................................................      119,910       138,888
  Other current assets................................................................       16,773        19,624
                                                                                         ----------    ----------
    Total Current Assets..............................................................      489,415       649,847
                                                                                         ----------    ----------
Property, plant and equipment, net....................................................      518,922       553,195
Excess of cost over net assets of businesses acquired, net of accumulated amortization
  of $118,319 and $133,344............................................................      409,886       526,928
Other assets..........................................................................       67,457        35,653
                                                                                         ----------    ----------
Total Assets..........................................................................   $1,485,680    $1,765,623
                                                                                         ----------    ----------
                                                                                         ----------    ----------
 
                         LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Short-term debt.....................................................................   $   39,076    $   87,937
  Current maturities of long-term debt................................................          684           583
  Accounts payable....................................................................       46,283        61,722
  Accrued liabilities.................................................................       74,092        84,534
  Income taxes........................................................................        7,200         8,417
                                                                                         ----------    ----------
    Total Current Liabilities.........................................................      167,335       243,193
                                                                                         ----------    ----------
Long-term debt less current maturities................................................      798,762       896,095
                                                                                         ----------    ----------
Deferred income taxes.................................................................       67,918        60,282
                                                                                         ----------    ----------
Other liabilities.....................................................................       63,493        64,330
                                                                                         ----------    ----------
Minority interest in subsidiary.......................................................      126,331            --
                                                                                         ----------    ----------
Commitments and Contingencies.........................................................
Stockholders' Equity:
  Preferred stock, $.01 par value per share; 20,000,000 shares authorized; no shares
    issued............................................................................           --            --
  Common stock, $.01 par value per share; 300,000,000 shares authorized; 53,833,333
    and 69,546,456 shares issued......................................................          538           695
  Additional paid-in capital..........................................................      212,413       489,285
  Treasury stock, at cost--735,744 shares.............................................           --        (8,388)
  Retained earnings...................................................................       40,080        44,892
  Accumulated other comprehensive income (loss).......................................        8,810       (24,761)
                                                                                         ----------    ----------
    Total Stockholders' Equity........................................................      261,841       501,723
                                                                                         ----------    ----------
Total Liabilities and Stockholders' Equity............................................   $1,485,680    $1,765,623
                                                                                         ----------    ----------
                                                                                         ----------    ----------
</TABLE>
 
The accompanying Notes to Consolidated Financial Statements are an integral part
                              of these statements.
 
                                      F-14
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                                    YEAR ENDED DECEMBER 31,
                                                                              -----------------------------------
                                                                                1996         1997         1998
                                                                              ---------    ---------    ---------
                                                                                          (THOUSANDS)
<S>                                                                           <C>          <C>          <C>
Cash and cash equivalents, beginning of year...............................   $  14,080    $  17,938    $  20,495
                                                                              ---------    ---------    ---------
Cash provided by operating activities:
  Net income...............................................................      53,933       54,005        4,812
  Adjustments to reconcile net income to net cash provided by operating
     activities:
       Income from discontinued operations.................................     (24,097)          --           --
       Extraordinary loss..................................................      30,950           --           --
       Provision for restructuring and impairment loss.....................          --           --       73,049
       Depreciation........................................................      38,279       41,877       50,063
       Goodwill amortization...............................................      13,200       13,294       15,025
       Deferred income taxes...............................................      (2,494)      28,570       (6,816)
  (Increase) decrease in working capital items.............................       2,532      (18,925)      (5,310)
  Purchases of trading securities..........................................     (43,236)    (196,513)    (223,062)
  Proceeds from sales of trading securities................................      47,901      119,864      272,027
  Decrease in other assets.................................................         385        2,200        3,129
  Increase (decrease) in other liabilities.................................         (31)       9,702          135
  Change in net receivable from/payable to affiliates......................     (14,665)       1,112       (3,645)
  Change in cumulative translation adjustment..............................      (6,943)      (6,238)       2,975
  Change in minority interest in subsidiary................................      12,360       13,552        9,730
  Other, net...............................................................        (561)      (7,967)      (5,281)
                                                                              ---------    ---------    ---------
Net cash provided by operating activities..................................     107,563       54,533      186,831
                                                                              ---------    ---------    ---------
Cash used in investing activities:
  Capital expenditures and acquisitions....................................     (54,587)     (68,655)    (166,040)
  Proceeds from sale-leaseback transaction.................................          --           --       56,050
  Proceeds from sale of assets.............................................          --           --        2,400
  Proceeds from sale of discontinued operation.............................      89,464           --           --
  Other cash used in discontinued operations...............................     (84,655)          --           --
  Purchases of available-for-sale securities...............................    (339,472)    (301,207)    (671,842)
  Purchases of held-to-maturity securities.................................     (14,331)      (1,623)     (12,287)
  Purchases of other short-term investments................................     (16,550)          --      (10,000)
  Proceeds from sales of available-for-sale securities.....................     301,851      344,408      477,014
  Proceeds from held-to-maturity securities................................      16,972        3,289          311
                                                                              ---------    ---------    ---------
Net cash used in investing activities......................................    (101,308)     (23,788)    (324,394)
                                                                              ---------    ---------    ---------
Cash provided by (used in) financing activities:
  Proceeds from sale of accounts receivable................................       2,000           --        4,000
  Increase (decrease) in short-term debt...................................     (14,249)      16,794       48,861
  Proceeds from issuance of long-term debt.................................     324,093           --           --
  Tender Offer of G-I Holdings Discount Notes..............................    (376,345)          --           --
  Repurchase of Discount Notes by G-I Holdings.............................     178,861           --           --
  Increase (decrease) in borrowings under revolving credit facility........      29,625      (35,425)      97,600
  Other increase (decrease) in long-term debt, net.........................         543         (153)        (643)
  Decrease in loans from affiliate.........................................    (117,834)          --           --
  Financing fees and expenses..............................................      (8,642)        (790)        (174)
  Repurchases of common stock..............................................          --           --       (9,326)
  Subsidiary's repurchases of common stock.................................     (15,134)     (10,240)          --
  Dividends and distributions to parent company............................     (68,049)          --           --
</TABLE>
 
                                      F-15
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
               CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
                                                                                    YEAR ENDED DECEMBER 31,
                                                                              -----------------------------------
                                                                                1996         1997         1998
                                                                              ---------    ---------    ---------
                                                                                          (THOUSANDS)
<S>                                                                           <C>          <C>          <C>

  Capital contribution from parent company.................................      61,558           --           --
  Other, net...............................................................       1,176        1,626        1,388
                                                                              ---------    ---------    ---------
Net cash provided by (used in) financing activities........................      (2,397)     (28,188)     141,706
                                                                              ---------    ---------    ---------
Net change in cash and cash equivalents....................................       3,858        2,557        4,143
                                                                              ---------    ---------    ---------
Cash and cash equivalents, end of year.....................................   $  17,938    $  20,495    $  24,638
                                                                              ---------    ---------    ---------
                                                                              ---------    ---------    ---------
Supplemental Cash Flow Information:
  Effect on cash from (increase) decrease in working capital items*:
     Accounts receivable...................................................   $  (8,884)   $ (12,655)   $   2,581
     Inventories...........................................................        (575)     (11,137)     (11,894)
     Other current assets..................................................        (967)      (2,547)         778
     Accounts payable......................................................       1,712    3,694....        8,985
     Accrued liabilities...................................................      11,511        4,989       (6,755)
     Income taxes..........................................................        (265)      (1,269)         995
                                                                              ---------    ---------    ---------
Net effect on cash from (increase) decrease in working capital items.......   $   2,532    $ (18,925)   $  (5,310)
                                                                              ---------    ---------    ---------
                                                                              ---------    ---------    ---------
Cash paid during the period for:
  Interest (net of amount capitalized).....................................   $  33,583    $  71,512    $  76,615
  Income taxes paid (refunded) (including taxes paid pursuant to the Tax
     Sharing Agreement)....................................................      61,701       (1,755)      22,109
 
  Acquisition of remaining 50% interest in GAF-Huls Chemie GmbH joint
     venture, net of $23,732 cash acquired**:
     Fair market value of assets acquired..................................                             $  48,003
     Purchase price of acquisition.........................................                                23,381
                                                                                                        ---------
     Liabilities assumed...................................................                             $  24,622
                                                                                                        ---------
                                                                                                        ---------
</TABLE>
 
------------------
 
 * Working capital items exclude cash and cash equivalents, short-term
   investments, short-term debt and payables to and receivables from related
   parties. Working capital acquired in connection with acquisitions is
   reflected within "Capital expenditures and acquisitions." The effects of
   reclassifications between noncurrent and current assets and liabilities are
   excluded from the amounts shown above. In addition, the increase in accounts
   receivable shown above does not reflect the cash proceeds from the sale of
   the Company's domestic trade accounts receivable (see Note 6); such proceeds
   are reflected in cash from financing activities. As discussed in Note 9, in
   October 1996, the Company issued $199.9 million of its 9 3/4% Senior Notes
   due 2002 in a noncash exchange offer for G-I Holdings' Series B 10% Senior
   Notes due 2006.
 
** The Company had a 50% equity interest in the cash held by the joint venture
   prior to the acquisition, which was classified within Other Assets on the
   Consolidated Balance Sheet.
 
The accompanying Notes to Consolidated Financial Statements are an integral part
                              of these statements.
 
                                      F-16
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                     CAPITAL
                                                                    STOCK AND               ACCUMULATED      RETAINED
                                                                    ADDITIONAL   TREASURY      OTHER         EARNINGS
                                                                     PAID-IN      STOCK     COMPREHENSIVE   (ACCUMULATED
                                                                     CAPITAL     AT COST    INCOME (LOSS)    DEFICIT)
                                                                    ----------   --------   -------------   ------------
                                                                                        (THOUSANDS)
<S>                                                                 <C>          <C>        <C>             <C>
Balance, December 31, 1995........................................   $ 56,342    $    --      $  14,556       $     --
  Comprehensive income, year ended December 31, 1996:
    Net income....................................................         --         --             --         53,933
    Other comprehensive income, net of tax:
      Unrealized holding gains, net of income taxes of $4,193.....                                6,293
      Less: Reclassification adjustment for gains included in net
        income, net of income taxes of $3,048.....................                                4,961
                                                                                              ---------
      Unrealized gains on available-for-sale securities...........         --         --          1,332             --
      Translation adjustment......................................         --         --         (6,943)            --
      Minimum pension liability adjustment........................         --         --          1,207             --
  Comprehensive income............................................
  Dividends and distributions to parent company...................         --         --             --        (67,858)
  Capital contribution from parent company........................     61,683         --             --             --
  Reclassification to additional paid-in capital of the excess of
    purchase price over the adjusted historical cost of
    predecessor company shares....................................    (72,605)        --             --             --
  Effect of exercises of subsidiary's stock options...............        717         --             --             --
  Effect of subsidiary's issuances of stock and options as
    incentives....................................................        289         --             --             --
                                                                     --------    --------     ---------       --------
Balance, December 31, 1996........................................   $ 46,426    $    --      $  10,152       $(13,925)
  Comprehensive income, year ended December 31, 1997:
    Net income....................................................         --         --             --         54,005
    Other comprehensive income, net of tax:
      Unrealized holding gains, net of income taxes of $7,849.....                               16,467
      Less: Reclassification adjustment for gains included in net
        income, net of income taxes of $4,781.....................                               10,834
                                                                                              ---------
      Unrealized gains on available-for-sale securities...........         --         --          5,633
      Translation adjustment......................................         --         --         (6,238)
      Effect of Separation Transactions on components of
        accumulated other comprehensive income (loss).............         --         --           (155)            --
      Minimum pension liability adjustment........................         --         --           (582)            --
  Comprehensive income............................................
  Effect of Separation Transactions...............................    165,840         --             --             --
  Effect of purchases of treasury stock...........................     (1,851)        --             --             --
  Effect of exercises of subsidiary's stock options...............      1,945         --             --             --
  Effect of subsidiary's issuances of stock and options as
    incentives....................................................        591         --             --             --
                                                                     --------    --------     ---------       --------
Balance, December 31, 1997........................................   $212,951    $    --      $   8,810       $ 40,080
  Comprehensive income (loss), year ended December 31, 1998:
    Net income....................................................         --         --             --          4,812
    Other comprehensive income (loss), net of tax:
      Unrealized holding losses, net of income tax benefit of
        $600......................................................                               (5,546)
      Less: Reclassification adjustment for gains included in net
        income, net of income taxes of $13,322....................                               26,782
                                                                                              ---------
      Unrealized losses on available-for-sale securities..........         --         --        (32,328)            --
      Translation adjustment......................................         --         --          2,975             --
      Effect of the Merger on components of accumulated other
        comprehensive income (loss)...............................         --         --           (196)            --
      Minimum pension liability adjustment........................         --         --         (4,022)            --
  Comprehensive income (loss).....................................
  Repurchases of common stock of ISP Holdings.....................         --     (1,312)            --             --
  Effect of the Merger............................................    275,982      1,312             --             --
  Repurchases of common stock--816,300 shares.....................         --     (9,326)            --             --
  Issuances under stock option plan--80,556 shares................         --        938             --             --
  Excess of proceeds over cost of treasury stock issued...........      1,570         --             --             --
  Effect of exercises of subsidiary's stock options...............     (2,019)        --             --             --
  Effect of issuances of stock options as incentives..............      1,496         --             --             --
                                                                     --------    --------     ---------       --------
Balance, December 31, 1998........................................   $489,980    $(8,388)     $ (24,761)      $ 44,892
                                                                     --------    --------     ---------       --------
                                                                     --------    --------     ---------       --------
 
<CAPTION>
                                                                    COMPREHENSIVE
                                                                    INCOME (LOSS)
                                                                    -------------
<S>                                                                 <C>
Balance, December 31, 1995........................................
  Comprehensive income, year ended December 31, 1996:
    Net income....................................................    $  53,933
                                                                      ---------
    Other comprehensive income, net of tax:
      Unrealized holding gains, net of income taxes of $4,193.....        6,293
      Less: Reclassification adjustment for gains included in net
        income, net of income taxes of $3,048.....................        4,961
                                                                      ---------
      Unrealized gains on available-for-sale securities...........        1,332
      Translation adjustment......................................       (6,943)
      Minimum pension liability adjustment........................        1,207
                                                                      ---------
  Comprehensive income............................................    $  49,529
                                                                      ---------
                                                                      ---------
  Dividends and distributions to parent company...................
  Capital contribution from parent company........................
  Reclassification to additional paid-in capital of the excess of
    purchase price over the adjusted historical cost of
    predecessor company shares....................................
  Effect of exercises of subsidiary's stock options...............
  Effect of subsidiary's issuances of stock and options as
    incentives....................................................
Balance, December 31, 1996........................................
  Comprehensive income, year ended December 31, 1997:
    Net income....................................................    $  54,005
                                                                      ---------
    Other comprehensive income, net of tax:
      Unrealized holding gains, net of income taxes of $7,849.....       16,467
      Less: Reclassification adjustment for gains included in net
        income, net of income taxes of $4,781.....................       10,834
                                                                      ---------
      Unrealized gains on available-for-sale securities...........        5,633
      Translation adjustment......................................       (6,238)
      Effect of Separation Transactions on components of
        accumulated other comprehensive income (loss).............         (155)
      Minimum pension liability adjustment........................         (582)
                                                                      ---------
  Comprehensive income............................................    $  52,663
                                                                      ---------
                                                                      ---------
  Effect of Separation Transactions...............................
  Effect of purchases of treasury stock...........................
  Effect of exercises of subsidiary's stock options...............
  Effect of subsidiary's issuances of stock and options as
    incentives....................................................
Balance, December 31, 1997........................................
  Comprehensive income (loss), year ended December 31, 1998:
    Net income....................................................    $   4,812
                                                                      ---------
    Other comprehensive income (loss), net of tax:
      Unrealized holding losses, net of income tax benefit of
        $600......................................................       (5,546)
      Less: Reclassification adjustment for gains included in net
        income, net of income taxes of $13,322....................       26,782
                                                                      ---------
      Unrealized losses on available-for-sale securities..........      (32,328)
      Translation adjustment......................................        2,975
      Effect of the Merger on components of accumulated other
        comprehensive income (loss)...............................         (196)
      Minimum pension liability adjustment........................       (4,022)
                                                                      ---------
  Comprehensive income (loss).....................................    $ (28,759)
                                                                      ---------
                                                                      ---------
  Repurchases of common stock of ISP Holdings.....................
  Effect of the Merger............................................
  Repurchases of common stock--816,300 shares.....................
  Issuances under stock option plan--80,556 shares................
  Excess of proceeds over cost of treasury stock issued...........
  Effect of exercises of subsidiary's stock options...............
  Effect of issuances of stock options as incentives..............
Balance, December 31, 1998........................................
</TABLE>
 
The accompanying Notes to Consolidated Financial Statements are an integral part
                              of these statements.
 
                                      F-17
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1. FORMATION OF THE COMPANY AND MERGER OF INTERNATIONAL SPECIALTY PRODUCTS
        INC. INTO ISP HOLDINGS INC.
 
     On July 15, 1998, International Specialty Products Inc. ("Old ISP") merged
(the "Merger") with and into ISP Holdings Inc. ("ISP Holdings"). In connection
with the Merger, ISP Holdings changed its name to International Specialty
Products Inc. (the "Company"). In the Merger, each outstanding share of Old
ISP's common stock, other than those held by ISP Holdings, was converted into
one share of common stock of the Company, and the outstanding shares of ISP
Holdings' common stock were converted into an aggregate of 53,833,333 shares (or
approximately 78%) of the outstanding shares of common stock of the Company. The
financial statements presented herein for periods prior to the Merger represent
the results of the former ISP Holdings.
 
     As a result of the Merger, the Company incurred $12.8 million of charges
against operating income in 1998, consisting of a $7.9 million charge in
connection with the termination of ISP Holdings' stock appreciation rights and
preferred stock option programs, a $2.6 million charge related to purchase
accounting adjustments and $2.2 million of other expenses relating to investment
banking, legal and other fees.
 
     Prior to January 1, 1997, ISP Holdings was a wholly-owned subsidiary of GAF
Corporation ("GAF"). ISP Holdings was formed on August 6, 1996 and 10 shares of
its common stock were issued to GAF in exchange for all of the capital stock of
G-I Holdings Inc. ("G-I Holdings"), which resulted in G-I Holdings becoming a
direct wholly-owned subsidiary of ISP Holdings.
 
     The accompanying Consolidated Financial Statements have been prepared on a
basis which retroactively reflects the formation of ISP Holdings, as discussed
above, for all periods presented. The net income for each period presented up to
the date ISP Holdings was formed has been reflected as dividends and/or
distributions to GAF.
 
     On January 1, 1997, GAF effected a series of transactions (the "Separation
Transactions") that resulted in, among other things, the capital stock of ISP
Holdings being distributed to the stockholders of GAF. As a result of such
distribution, ISP Holdings and Old ISP are no longer direct or indirect
subsidiaries of GAF. Conversely, the assets and liabilities of the other
wholly-owned subsidiaries of G-I Holdings, including Building Materials
Corporation of America ("BMCA"), U.S. Intec, Inc. ("U.S. Intec"), and GAF
Fiberglass Corporation ("GFC"), are no longer included in the consolidated
assets and liabilities of the Company.
 
     Accordingly, the results of operations and assets and liabilities of G-I
Holdings, BMCA, U.S. Intec and GFC, as well as GAF Broadcasting Company, Inc.
(whose assets were sold in August 1996), have been classified as "Discontinued
Operations" within the financial statements for all periods presented prior to
the Separation Transactions.
 
     The Company is engaged principally in the manufacture and sale of a wide
range of specialty chemicals, mineral products and filter products. See
Notes 13 and 14 for a description of and financial information relating to the
Company's business segments and foreign and domestic operations.
 
     See Note 15 for information related to discontinued operations.
 
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Principles of Consolidation
 
     All subsidiaries are consolidated and intercompany transactions have been
eliminated.
 
  Financial Statement Estimates
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates.
Actual results could differ from those estimates. In the opinion of management,
the financial statements herein contain all adjustments necessary to present
fairly the financial
 
                                      F-18
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
position and the results of operations and cash flows of the Company for the
periods presented. The Company has a policy to review the recoverability of
long-lived assets and identify and measure any potential impairments. The
Company does not anticipate any changes in management estimates that would have
a material impact on operations, liquidity or capital resources.
 
  Short-term Investments
 
     For securities classified as "trading" (including short positions),
unrealized gains and losses are reflected in income. For securities classified
as "available-for-sale," unrealized gains and losses, net of income tax effect,
are included in a separate component of stockholders' equity, "Accumulated other
comprehensive income (loss)," and amounted to $8.0 and $(24.0) million as of
December 31, 1997 and 1998, respectively. Investments classified as
"held-to-maturity" securities are carried at amortized cost in the Consolidated
Balance Sheets.
 
     Included in "Investments in available-for-sale securities" at December 31,
1998 is a $136.3 million investment (based on market value) in Life
Technologies, Inc. Such investment represents approximately 15% of the total
outstanding common stock of Life Technologies, Inc.
 
     "Other income, net," includes $20.7, $46.7 and $43.2 million of net
realized and unrealized gains on securities in 1996, 1997 and 1998,
respectively. The determination of cost in computing realized gains and losses
is based on the specific identification method.
 
     As of December 31, 1997 and 1998, the market value of the Company's equity
securities held long was $207.0 and $320.7 million, respectively, and the
Company had $29.5 and $82.4 million, respectively, of short positions in common
stocks, based on market value. As of December 31, 1997 and 1998, the market
value of the Company's held-to-maturity securities was $0.3 and $12.3 million,
respectively. The Company enters into equity-related financial instruments with
off-balance-sheet risk as a means to manage its exposure to market fluctuations
on its short-term investments. As of December 31, 1998, the value of
equity-related short contracts was $276.7 million, while the value of
equity-related long contracts was $56.1 million, both of which are
marked-to-market each month, with unrealized gains and losses included in the
results of operations. The market values referred to above are based on
quotations as reported by various stock exchanges and major broker-dealers. With
respect to its investments in securities, the Company is exposed to the risk of
market loss.
 
     "Other short-term investments" are investments in limited partnerships
which are accounted for by the equity method. Gains and losses are reflected in
"Other income, net." Liquidation of partnership interests generally require a 30
to 45 day notice period.
 
     Cash and cash equivalents include cash on deposit and debt securities
purchased with original maturities of three months or less.
 
  Inventories
 
     Inventories are stated at the lower of cost or market. The LIFO (last-in,
first-out) method is utilized to determine cost for a substantial portion of the
Company's domestic inventories. All other inventories are determined principally
based on the FIFO (first-in, first-out) method.
 
  Property, Plant and Equipment
 
     Property, plant and equipment is stated at cost less accumulated
depreciation. Depreciation is computed principally on the straight-line method
based on the estimated economic lives of the assets. The Company uses an
economic life of 10-20 years for land improvements, 40 years for buildings, and
3-20 years for machinery and equipment, which includes furniture and fixtures.
Certain interest charges are capitalized during the period of construction as
part of the cost of property, plant and equipment.
 
                                      F-19
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
  Foreign Exchange Contracts
 
     The Company enters into forward foreign exchange instruments with
off-balance-sheet risk in order to hedge a portion of both its borrowings
denominated in foreign currency and its firm or anticipated purchase commitments
related to the operations of foreign subsidiaries. Gains and losses on
instruments used to hedge firm purchase commitments are deferred, and
amortization is included in the measurement of the foreign currency transactions
hedged. Gains and losses on instruments used to hedge anticipated purchases are
recognized within "Other income, net."
 
     Forward contract agreements require the Company and the counterparty to
exchange fixed amounts of U.S. dollars for fixed amounts of foreign currency on
specified dates. The market value of such contracts varies with changes in the
market exchange rates. The Company is exposed to credit loss in the event of
nonperformance by the counterparties to the forward contract agreements.
However, the Company does not anticipate nonperformance by the counterparties.
The Company does not generally require collateral or other security to support
these financial instruments.
 
     As of December 31, 1997 and 1998, the U.S. dollar equivalent fair value of
outstanding forward foreign exchange contracts was $151.6 and $90.8 million,
respectively, and the amount of net unrealized gains (losses) on such
instruments was $1.4 and ($4.4) million at December 31, 1997 and 1998,
respectively. All forward contracts are in major currencies with highly liquid
markets and mature within one year. The Company uses quoted market prices
obtained from major financial institutions to determine the market value of its
outstanding forward exchange contracts. In addition, the U.S. dollar equivalent
fair value of foreign exchange contracts outstanding as of December 31, 1997 and
1998 entered into as a hedge of non-local currency intercompany loans was $24.9
and $18.4 million, respectively, representing 100% of the Company's foreign
currency exposure with respect to such loans.
 
     The Company continually monitors its risk from the effects of foreign
currency fluctuations on its operations and on the derivative products used to
hedge its risk. The Company utilizes real-time, on-line foreign exchange data
and news as well as evaluation of economic information provided by financial
institutions. Mark-to-market valuations are made on a regular basis. Hedging
strategies are approved by senior management before being implemented.
 
  Foreign Currency Translation
 
     Assets and liabilities of foreign subsidiaries, other than those located in
highly inflationary countries, are translated at year-end exchange rates. The
effects of these translation adjustments are reported in a separate component of
stockholders' equity, "Accumulated other comprehensive income (loss)," and
amounted to $1.4 and $4.0 million as of December 31, 1997 and 1998,
respectively. Income and expenses are translated at average exchange rates
prevailing during the year. Exchange gains and losses arising from transactions
denominated in a currency other than the functional currency of the entity
involved, and translation adjustments of subsidiaries in countries with highly
inflationary economies, are included in "Other income, net".
 
  Excess of Cost Over Net Assets of Businesses Acquired ("Goodwill")
 
     Goodwill, which arose principally from the 1989 management-led buyout (the
"Acquisition") of the predecessor company to the Company's former parent
company, GAF, and as a result of the Merger (see Note 1), is amortized on the
straight-line method over a period of approximately 40 years. The Company
believes that the goodwill is recoverable. To determine if goodwill is
recoverable, the Company compares the net carrying amount to undiscounted
projected cash flows of the underlying businesses to which the goodwill
pertains. If goodwill is not recoverable, the Company would record an impairment
based on the difference between the net carrying amount and fair value.
 
                                      F-20
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
  Debt Issuance Costs
 
     Debt issuance costs are amortized to expense over the life of the related
debt.
 
  Interest Rate Swaps
 
     Gains (losses) on interest rate swap agreements ("swaps") are deferred and
amortized as a reduction (increase) of interest expense over the remaining life
of the debt issue with respect to which the swaps were entered.
 
  Research and Development
 
     Research and development costs are charged to operations as incurred and
amounted to $25.4, $27.3 and $26.3 million for 1996, 1997 and 1998,
respectively.
 
  Earnings per Common Share
 
     In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
per Share", which requires the Company to present Basic Earnings per Share and
Diluted Earnings per Share. Earnings per share data for all periods prior to the
Merger are calculated based on the 53,833,333 shares of the Company's common
stock held by ISP Holdings' stockholders. For periods subsequent to the Merger,
"Basic Earnings per Share" are calculated based on the total weighted average
number of shares of the Company's common stock outstanding during the period.
"Diluted Earnings per Share" for periods subsequent to the Merger give effect to
all potential dilutive common shares outstanding during the period under the
Company's 1991 Incentive Plan for Key Employees and Directors (see Note 11).
 
  Investment in Joint Venture
 
     Prior to April 1, 1998, the Company had a 50% equity ownership in GAF-Huls
Chemie GmbH ("GhC"), a joint venture which operated a chemical manufacturing
plant in Germany, and was accounted for by the equity method. Effective
April 1, 1998, the Company acquired the remaining 50% interest in GhC (see
Note 5). The Company's equity in the net assets of GhC was $34.3 million as of
December 31, 1997, and is included in "Other assets." Dividends received by the
Company from GhC totaled $5.7, $6.3 and $8.1 million for 1996, 1997 and 1998,
respectively.
 
  Environmental Liability
 
     The Company, together with other companies, is a party to a variety of
proceedings and lawsuits involving environmental matters. The Company estimates
that its liability in respect of such environmental matters, and certain other
environmental compliance expenses, as of December 31, 1998, is $20.0 million,
before reduction for insurance recoveries reflected on its balance sheet of
$10.7 million. The Company's liability is reflected on an undiscounted basis.
See Note 16 for further discussion with respect to environmental liabilities and
estimated insurance recoveries.
 
  Accumulated Other Comprehensive Income (Loss)
 
     In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting comprehensive income and its
components in annual and interim financial statements. The Company adopted SFAS
No. 130 as of January 1, 1998 and has reclassified financial statements for
earlier periods. In the Company's case, comprehensive income includes net
income, unrealized gains and losses from investments in available-for-sale
securities, net of income tax effect, foreign currency translation adjustments,
 
                                      F-21
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
and minimum pension liability adjustments. The Company has chosen to disclose
Comprehensive Income in the Consolidated Statements of Stockholders' Equity.
 
     Changes in the components of "Accumulated other comprehensive income
(loss)" for the years 1996, 1997 and 1998 are as follows:
 
<TABLE>
<CAPTION>
                                                 UNREALIZED        CUMULATIVE
                                                 GAINS (LOSSES)     FOREIGN       MINIMUM      ACCUMULATED
                                                 ON AVAILABLE-     CURRENCY       PENSION         OTHER
                                                  FOR-SALE         TRANSLATION   LIABILITY     COMPREHENSIVE
                                                 SECURITIES        ADJUSTMENT    ADJUSTMENT    INCOME (LOSS)
                                                 --------------    ----------    ----------    -------------
                                                                         (THOUSANDS)
<S>                                              <C>               <C>           <C>           <C>
Balance, December 31, 1995....................      $  1,750        $ 14,096      $ (1,290)      $  14,556
Change for the year 1996......................         1,332          (6,943)        1,207          (4,404)
                                                    --------        --------      --------       ---------
Balance, December 31, 1996....................      $  3,082        $  7,153      $    (83)      $  10,152
Change for the year 1997......................         4,925          (5,768)         (499)         (1,342)
                                                    --------        --------      --------       ---------
Balance, December 31, 1997....................      $  8,007        $  1,385      $   (582)      $   8,810
Change for the year 1998......................       (32,044)          2,606        (4,133)        (33,571)
                                                    --------        --------      --------       ---------
Balance, December 31, 1998....................      $(24,037)       $  3,991      $ (4,715)      $ (24,761)
                                                    --------        --------      --------       ---------
                                                    --------        --------      --------       ---------
</TABLE>
 
  New Accounting Standard
 
     In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement.
 
     SFAS No. 133 is effective for fiscal years beginning after June 15, 1999,
but may be adopted earlier. The Company has not yet determined the effect of
adoption of SFAS No. 133 and has not determined the timing or method of adoption
of the statement. Adoption of SFAS No. 133 could increase volatility in earnings
and other comprehensive income.
 
NOTE 3. PROVISION FOR RESTRUCTURING AND IMPAIRMENT LOSS
 
     The Company announced in January 1999 that it was shutting down its
butanediol production unit at its Calvert City, Kentucky manufacturing facility.
The decision to shut down this production unit, the Company's highest-cost
butanediol production, resulted from significant adverse changes in the
butanediol market and the Company's acquisition of the remaining 50% interest in
GhC (see Note 5). Accordingly, the Company recorded a one-time restructuring
charge against operating income of $42.7 million, as detailed below.
 
     In conjunction with the decision to shut down the butanediol production
unit in Calvert City, the Company also reviewed its butanediol production assets
at its Texas City and Seadrift, Texas manufacturing facilities to determine if
the carrying amount of such assets was recoverable. As a result of determining
that the expected undiscounted cash flows of the assets is less than their
carrying amount, the Company recognized an impairment loss of $16.6 million to
write down these assets to fair value.
 
     Prior to acquiring the remaining 50% interest in GhC, the Company intended
to acquire or develop a European manufacturing facility to meet the needs of the
Company's European business. Costs incurred in previous years for this project
totaled $10.7 million and were included in "Construction in progress" at
December 31, 1997. Such costs represented site evaluation, engineering,
infrastructure and future technology.
 
                                      F-22
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 3. PROVISION FOR RESTRUCTURING AND IMPAIRMENT LOSS--(CONTINUED)
Based on the Company's decision to discontinue this project as no longer needed
as a result of the adverse changes in the butanediol market and the GhC
acquisition, these costs are no longer recoverable and were written off in the
fourth quarter of 1998.
 
     In the third quarter of 1998, the Company reserved $3.0 million for the
consolidation of offices in its European operations, consisting of $0.5 million
for severance related to 52 terminated employees in the sales and marketing,
finance and accounting, and the supply chain departments, $1.7 million for lease
obligations and $0.8 million for the relocation of headquarters operations and
other related expenses. As of December 31, 1998, this accrual had a remaining
balance of $1.8 million.
 
     Following is a detail of the $73.0 million provision for restructuring and
impairment loss:
 
<TABLE>
<CAPTION>
                                                                            (MILLIONS)
                                                                            ----------
<S>                                                                         <C>
Write-off of Calvert City production assets..............................     $ 22.1
Impairment loss on Texas City and Seadrift assets........................       16.6
Write-off of goodwill related to the butanediol business.................       13.1
Write-off of fixed asset costs related to the terminated European
  expansion project......................................................       10.7
Accrual for decommissioning, demolition and remediation costs............        4.7
Accrual for severance costs..............................................        0.9
Accrual for costs related to termination of raw material contracts and
  other related costs....................................................        1.9
Accrual for consolidation of European offices............................        3.0
                                                                              ------
Total provision..........................................................     $ 73.0
                                                                              ------
                                                                              ------
</TABLE>
 
     Of the total $70.0 million provision recorded in the fourth quarter of
1998, $7.5 million represents cash costs to be incurred, mainly in 1999,
including severance costs of $0.9 million for 41 terminated employees who were
operators and supervisors in the butanediol production unit that was shut down.
As a result of the write-off of property, plant and equipment and goodwill, the
Company estimates that its depreciation expense will be lowered by approximately
$4.5 million per year and that goodwill amortization will be lowered by
approximately $0.4 million per year.
 
NOTE 4. INCOME TAXES
 
     Income tax (provision) benefit for continuing operations consists of the
following:
 
<TABLE>
<CAPTION>
                                                                           YEAR ENDED DECEMBER 31,
                                                                       -------------------------------
                                                                         1996       1997       1998
                                                                       ---------  ---------  ---------
                                                                                 (THOUSANDS)
<S>                                                                    <C>        <C>        <C>
Federal:
  Current............................................................  $ (35,743) $  (2,957) $    (815)
  Deferred...........................................................      2,071    (27,832)     6,598
                                                                       ---------  ---------  ---------
     Total Federal...................................................    (33,672)   (30,789)     5,783
                                                                       ---------  ---------  ---------
Foreign-current......................................................     (6,648)    (5,394)   (19,919)
                                                                       ---------  ---------  ---------
State and local:
  Current............................................................     (2,182)    (2,216)    (1,407)
  Deferred...........................................................        423       (738)       218
                                                                       ---------  ---------  ---------
     Total state and local...........................................     (1,759)    (2,954)    (1,189)
                                                                       ---------  ---------  ---------
Income tax provision.................................................  $ (42,079) $ (39,137) $ (15,325)
                                                                       ---------  ---------  ---------
                                                                       ---------  ---------  ---------
</TABLE>
 
                                      F-23
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 4. INCOME TAXES--(CONTINUED)
     The differences between the income tax provision computed by applying the
statutory Federal income tax rate to pre-tax income, and the income tax
provision reflected in the Consolidated Statements of Income are as follows:
 
<TABLE>
<CAPTION>
                                                                           YEAR ENDED DECEMBER 31,
                                                                       -------------------------------
                                                                         1996       1997       1998
                                                                       ---------  ---------  ---------
                                                                                 (THOUSANDS)
<S>                                                                    <C>        <C>        <C>
Statutory tax provision..............................................  $ (40,820) $ (37,742) $ (10,646)
Impact of:
  Foreign operations.................................................      1,848      2,541      1,916
  State and local taxes, net of Federal benefits.....................     (1,143)    (1,920)      (774)
  Nondeductible goodwill amortization................................     (4,620)    (4,611)    (9,858)
  Percentage depletion...............................................      1,668      1,680      1,929
  Other, net.........................................................        988        915      2,108
                                                                       ---------  ---------  ---------
Income tax provision.................................................  $ (42,079) $ (39,137) $ (15,325)
                                                                       ---------  ---------  ---------
                                                                       ---------  ---------  ---------
</TABLE>
 
     The components of the net deferred tax liability are as follows:
 
<TABLE>
<CAPTION>
                                                                             DECEMBER 31,
                                                                         --------------------
                                                                           1997       1998
                                                                         ---------  ---------
                                                                             (THOUSANDS)
<S>                                                                      <C>        <C>
Deferred tax liabilities related to:
  Property, plant and equipment........................................  $  93,603  $  95,776
  Other................................................................      2,201         --
                                                                         ---------  ---------
Total deferred tax liabilities.........................................     95,804     95,776
                                                                         ---------  ---------
Deferred tax assets related to:
  Expenses not yet deducted for tax purposes...........................    (13,558)   (12,323)
  Deferred income......................................................    (11,092)      (499)
  Foreign tax credits not yet utilized under the Tax Sharing
     Agreement.........................................................     (4,341)        --
  Carryover AMT and R&D credits........................................         --     (7,802)
  Other................................................................     (5,749)   (25,222)
                                                                         ---------  ---------
Total deferred tax assets..............................................    (34,740)   (45,846)
                                                                         ---------  ---------
Net deferred tax liability.............................................     61,064     49,930
Deferred tax assets reclassified to other current assets...............      6,854     10,352
                                                                         ---------  ---------
Noncurrent deferred tax liability......................................  $  67,918  $  60,282
                                                                         ---------  ---------
                                                                         ---------  ---------
</TABLE>
 
     The Company was a party to tax sharing agreements with members of the GAF
consolidated group (the "GAF Group"). As a result of the Separation
Transactions, the Company is no longer included in the consolidated Federal
income tax returns of GAF, and therefore, such tax sharing agreements are no
longer applicable with respect to the tax liabilities of the Company for periods
subsequent to the Separation Transactions. The Company remains obligated,
however, with respect to tax liabilities imposed or that may be imposed for
periods prior to the Separation Transactions. Among other things, those tax
sharing agreements provide for the sharing of the GAF Group's consolidated tax
liability based on each member's share of the tax as if such member filed on a
separate basis. Accordingly, a payment of tax would be made to GAF equal to the
Company's allocable share of the GAF Group's consolidated tax liability.
Alternatively, the Company would be entitled to refunds if losses or other
attributes reduce the GAF Group's consolidated tax liability. Moreover, foreign
tax credits generated by the Company not utilized by GAF will be refunded by GAF
or its subsidiary to the Company, if such credits expire unutilized upon
termination of the statute of limitations for the year of
 
                                      F-24
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 4. INCOME TAXES--(CONTINUED)
expiration. Furthermore, those tax sharing agreements provide for an
indemnification to the Company for any tax liability attributable to another
member of the GAF Group.
 
     On September 15, 1997, GAF received a notice from the IRS of a deficiency
in the amount of $84.4 million (after taking into account the use of net
operating losses and foreign tax credits otherwise available for use in later
years) in connection with the formation in 1990 of Rhone-Poulenc Surfactants and
Specialties, L.P. (the "surfactants partnership"), a partnership in which GFC, a
subsidiary of GAF, holds an interest. The claim of the IRS for interest and
penalties, after taking into account the effect on the use of net operating
losses and foreign tax credits, could result in GAF incurring liabilities
significantly in excess of the deferred tax liability of $131.4 million that it
recorded in 1990 in connection with this matter. GAF has advised the Company
that it believes that it will prevail in this matter, although there can be no
assurance in this regard. The Company believes that the ultimate disposition of
this matter will not have a material adverse effect on its business, financial
position or results of operations. GAF, G-I Holdings and certain subsidiaries of
GAF have agreed to jointly and severally indemnify the Company against any tax
liability associated with the surfactants partnership, which the Company would
be severally liable for, together with GAF and several current and former
subsidiaries of GAF, should GAF be unable to satisfy such liability.
 
NOTE 5. ACQUISITIONS
 
     Effective April 1, 1998, the Company acquired the remaining 50% interest in
GhC, its joint venture with Huls AG. GhC consists of a manufacturing facility
that produces primarily butanediol and tetrahydrofuran. As part of the
transaction, the Company also acquired Huls' production facility that supplies
GhC with acetylene, its primary raw material. The results of GhC are included in
the Company's financial statements on a consolidated basis from the date of
acquisition, including sales of $53.0 million for 1998.
 
     In February 1998, the Company acquired Polaroid Corporation's Freetown,
Massachusetts fine chemicals facility. In connection with the acquisition, the
Company entered into a sale-leaseback arrangement for the facility's equipment
with a third party. The lease has been accounted for as an operating lease, with
an initial term of four years and, at the Company's option, up to three one-year
renewal periods. As part of the acquisition transaction, the Company entered
into a long-term supply and license agreement with Polaroid for the imaging
chemicals and polymers manufactured at the facility and used by Polaroid in its
instant film business. The results of the Freetown facility are included in the
Company's financial statements from the date of acquisition and were not
material to 1998 operations.
 
NOTE 6. SALE OF ACCOUNTS RECEIVABLE
 
     In June 1993 the Company sold its domestic trade accounts receivable,
without recourse, for a maximum of $25 million in cash to be made available to
the Company based on eligible domestic receivables outstanding from time to
time. The agreement under which the Company sells its domestic trade accounts
receivable was renewed each year through 1998 for one-year periods on
substantially the same terms and conditions, and the maximum purchase amount was
increased in January 1998 to provide for up to $33 million in cash. In January
1999, the agreement was extended for a six-month period through June 1999. The
excess of accounts receivable sold over the net proceeds received is included in
"Accounts receivable, other." The effective cost to the Company varies with
LIBOR or commercial paper rates and is included in "Other income, net" and
amounted to $1.6, $1.8 and $1.8 million in 1996, 1997 and 1998, respectively.
 
                                      F-25
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 7. INVENTORIES
 
     At December 31, 1997 and 1998, $52.0 and $61.8 million, respectively, of
domestic inventories were valued using the LIFO method. Inventories comprise the
following:
 
<TABLE>
<CAPTION>
                                                                             DECEMBER 31,
                                                                        ----------------------
                                                                           1997        1998
                                                                        ----------  ----------
                                                                             (THOUSANDS)
<S>                                                                     <C>         <C>
Finished goods........................................................  $   84,912  $   87,241
Work in process.......................................................      20,088      24,862
Raw materials and supplies............................................      18,408      30,065
                                                                        ----------  ----------
  Total...............................................................     123,408     142,168
Less LIFO reserve.....................................................      (3,498)     (3,280)
                                                                        ----------  ----------
Inventories...........................................................  $  119,910  $  138,888
                                                                        ----------  ----------
                                                                        ----------  ----------
</TABLE>
 
NOTE 8. PROPERTY, PLANT AND EQUIPMENT
 
     Property, plant and equipment comprises the following:
 
<TABLE>
<CAPTION>
                                                                            DECEMBER 31,
                                                                       ----------------------
                                                                         1997         1998
                                                                       ---------    ---------
                                                                            (THOUSANDS)
<S>                                                                    <C>          <C>
Land and land improvements..........................................   $  72,944    $  74,057
Buildings and building equipment....................................      87,574       90,530
Machinery and equipment.............................................     509,196      499,160
Construction in progress............................................      65,651       96,875
                                                                       ---------    ---------
  Total.............................................................     735,365      760,622
Less accumulated depreciation.......................................    (216,443)    (207,427)
                                                                       ---------    ---------
Property, plant and equipment, net..................................   $ 518,922    $ 553,195
                                                                       ---------    ---------
                                                                       ---------    ---------
</TABLE>
 
     See Note 16 for information regarding capital leases.
 
NOTE 9. LONG-TERM DEBT AND LINES OF CREDIT
 
     Long-term debt comprises the following:
 
<TABLE>
<CAPTION>
                                                                            DECEMBER 31,
                                                                         --------------------
                                                                           1997        1998
                                                                         --------    --------
                                                                             (THOUSANDS)
<S>                                                                      <C>         <C>
9% Senior Notes due 2003..............................................   $324,249    $324,378
9 3/4% Senior Notes due 2002..........................................    199,871     199,871
9% Senior Notes due 1999..............................................    200,000     200,000
Borrowings under revolving credit facility............................     35,000     132,600
Obligation on mortgaged property, due 1999............................     38,125      38,125
Obligations under capital leases (Note 16)............................      1,939       1,317
Other.................................................................        262         387
                                                                         --------    --------
  Total long-term debt................................................    799,446     896,678
Less current maturities...............................................       (684)       (583)
                                                                         --------    --------
Long-term debt less current maturities................................   $798,762    $896,095
                                                                         --------    --------
                                                                         --------    --------
</TABLE>
 
                                      F-26
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 9. LONG-TERM DEBT AND LINES OF CREDIT--(CONTINUED)
 
     In October 1996, the Company issued $325 million principal amount of 9%
Senior Notes due 2003 (the "9% Senior Notes"). The net cash proceeds of
$317.2 million were utilized to consummate a cash tender offer (the "Tender
Offer") for all of the Senior Discount Notes and Series B Senior Discount Notes
due 1998 (the "Discount Notes") of G-I Holdings.
 
     In October 1996, the Company consummated an offer to exchange (the
"Exchange Offer") $1,000 principal amount of 9 3/4% Senior Notes due 2002 (the
"9 3/4% Senior Notes") for each $1,000 principal amount of G-I Holdings' Series
B 10% Senior Notes due 2006 (the "10% Notes"). Pursuant to the Exchange Offer,
an aggregate amount of $199.9 million of 9 3/4% Senior Notes were issued to the
former holders of the 10% Notes.
 
     See Note 15 for additional information.
 
     Holders of the 9% Senior Notes and the 9 3/4% Senior Notes (collectively,
the "Notes") have the right to require the Company to purchase the Notes at a
price of 101% of their principal amount, and the Company has the right to redeem
the Notes at their principal amount plus the Applicable Premium (as defined),
together with any accrued and unpaid interest, in the event of a Change of
Control (as defined). Under the indentures relating to the Notes, the incurrence
of additional debt and the issuance of preferred stock by the Company would be
restricted unless, subject to certain exceptions, the ratio of consolidated
income before income taxes, interest, depreciation and amortization expense to
the consolidated interest expense (as defined) for the most recently completed
four fiscal quarters is at least 2 to 1. For the four quarters ended
December 31, 1998, the Company was in compliance with such test.
 
     In connection with the issuance of the 9% Senior Notes due March 1999 (the
"9% Notes"), the Company entered into interest rate swap agreements ("swaps")
with banks in an aggregate notional principal amount of $200 million. In 1993,
the Company terminated the swaps, resulting in gains of $25.1 million, and
entered into new swaps. The gains were deferred and are being amortized as a
reduction of interest expense over the remaining life of the 9% Notes. As a
result of the new swaps, the effective interest cost to the Company of the 9%
Notes varies at a fixed spread over LIBOR. During 1997, the Company entered into
five-year swaps with banks in the aggregate notional principal amount of
$100 million in order to fix a portion of its interest expense and reduce its
exposure to floating interest rates. These swaps require the Company to pay a
fixed rate and receive LIBOR for a period of five years. In 1998, the Company
entered into forward-starting swaps in the aggregate notional principal amount
of $125 million in order to convert $125 million of its exposure to floating
interest rates to fixed rates. As of December 31, 1998, such swaps had a
maturity of March 1, 1999. Based on the fair value of all of the aforementioned
swaps at December 31, 1997 and 1998, the Company would have incurred losses of
$3.3 and $10.2 million, respectively, representing the estimated amount that
would be payable by the Company if the swaps were terminated at such dates.
 
     The Company may be considered to be at risk, to the extent of the costs of
replacing such swaps at current market rates, in the event of nonperformance by
counterparties. However, since the counterparties are major financial
institutions, the credit ratings of which are continually monitored by the
Company, the risk of such nonperformance is considered by the Company to be
remote.
 
     In July 1996, the Company entered into a new five-year revolving credit
facility (the "Credit Agreement") with a group of banks, which provides for
loans of up to $400 million and letters of credit of up to $75 million.
Borrowings under the Credit Agreement bear interest at a floating rate (6.23% on
December 31, 1998) based on the banks' base rate, federal funds rate, Eurodollar
rate or a competitive bid rate (which may be based on LIBOR or money market
rates), at the option of the Company. As of December 31, 1998, letters of credit
in the amount of $7.9 million were outstanding under the Credit Agreement.
 
     The Company has a $38.1 million mortgage obligation, due April 1999, on its
headquarters property. Interest on the mortgage is at a floating rate based on
LIBOR. See Note 17.
 
                                      F-27
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 9. LONG-TERM DEBT AND LINES OF CREDIT--(CONTINUED)
     Borrowings by the Company, including those under the Credit Agreement, are
subject to the application of certain financial covenants contained in such
agreement and in the indentures relating to the Notes. As of December 31, 1998,
the Company was in compliance with such covenants, and the application of such
covenants would not have restricted the amount available for borrowing under the
Credit Agreement. The Credit Agreement and the indentures relating to the Notes
also limit the amount of cash dividends, purchases of treasury stock, and other
restricted payments (as defined) by the Company. As of December 31, 1998, under
the most restrictive of such limitations, the Company could have paid dividends
and other restricted payments of up to $56.6 million.
 
     The Credit Agreement and the indentures relating to the Notes contain
additional affirmative and negative covenants, including restrictions on liens,
investments, transactions with affiliates, sale-leaseback transactions, and
mergers and transfers of all or substantially all of the assets of the Company
or its subsidiaries. The Credit Agreement also provides for a default if there
is a change in control (as defined) of the Company.
 
     The Company believes that the fair value of its non-public variable rate
indebtedness approximates the book value of such indebtedness because the
interest rates on such indebtedness are at floating short-term rates. The Credit
Agreement also provides for adjustments to the interest rate if there is a
change in the credit rating of the Company. With respect to the Company's
publicly traded debt securities, the Company has obtained estimates of fair
values from an independent source believed to be reliable. The estimated fair
value of the 9% Senior Notes as of December 31, 1997 and 1998 was $335.8 and
$341.4 million, respectively, and the estimated fair value of the 9 3/4% Senior
Notes as of December 31, 1997 and 1998 was $211.1 and $212.4 million,
respectively. The estimated fair value of the 9% Notes as of December 31, 1997
and 1998 was $205.5 and $201.0 million, respectively.
 
     The aggregate maturities of long-term debt as of December 31, 1998 for the
next five years are as follows:
 
<TABLE>
<CAPTION>
                                                                (THOUSANDS)
                                                                -----------
<S>                                                             <C>
1999.........................................................     $   583
2000.........................................................         415
2001.........................................................     132,946
2002.........................................................     200,040
2003.........................................................     324,416
</TABLE>
 
     In the above table, 1999 maturities exclude the $200 million of 9% Notes
due March 1, 1999 and the $38.1 million mortgage obligation (see Note 17).
Maturities in 2001 include the $132.6 million of borrowings outstanding under
the Credit Agreement as of December 31, 1998, based on the expiration of the
Credit Agreement in July 2001. Maturities in 2002 include the $199.9 million of
9 3/4% Senior Notes. Maturities in 2003 include the $324.4 million of 9% Senior
Notes, based on their accreted value as of December 31, 1998.
 
     At December 31, 1998, the Company's foreign subsidiaries had total
available short-term lines of credit aggregating $26.9 million, of which
$14.6 million were unused. The weighted average interest rate on the Company's
short-term borrowings as of December 31, 1997 and 1998 was 5.7% and 5.5%,
respectively.
 
                                      F-28
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 10. BENEFIT PLANS
 
     Eligible, full-time employees of the Company are covered by various benefit
plans, as described below.
 
  Defined Contribution Plan
 
     The Company provides a defined contribution plan for eligible employees.
The Company contributes up to 7% of participants' compensation (any portion of
which can be contributed, at the participants' option, in the form of the
Company's common stock at a $.50 per share discount from the market price on the
date of contribution), and also contributes fixed amounts, ranging from $50 to
$750 per year depending on age, to the accounts of participants who are not
covered by a Company-provided postretirement medical benefit plan. The aggregate
contributions by the Company were $6.4, $7.0 and $8.0 million for 1996, 1997 and
1998, respectively.
 
  Defined Benefit Plans
 
     The Company provides a noncontributory defined benefit retirement plan for
certain hourly employees (the "Hourly Retirement Plan"). Benefits under this
plan are based on stated amounts for each year of service. The Company's funding
policy is consistent with the minimum funding requirements of ERISA.
 
     The Company's net periodic pension cost (income) for the Hourly Retirement
Plan included the following components:
 
<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                                 -----------------------------
                                                                  1996       1997       1998
                                                                 -------    -------    -------
                                                                          (THOUSANDS)
<S>                                                              <C>        <C>        <C>
Service cost..................................................   $   315    $   284    $   313
Interest cost.................................................     1,439      1,481      1,586
Expected return on plan assets................................    (1,733)    (2,152)    (2,366)
Amortization of unrecognized prior service cost...............       174        174        174
                                                                 -------    -------    -------
Net periodic pension cost (income)............................   $   195    $  (213)   $  (293)
                                                                 -------    -------    -------
                                                                 -------    -------    -------
</TABLE>
 
     The following tables set forth, for the years 1997 and 1998,
reconciliations of the beginning and ending balances of the benefit obligation,
fair value of plan assets, funded status, amounts recognized in the
 
                                      F-29
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 10. BENEFIT PLANS--(CONTINUED)
Consolidated Balance Sheets and changes in Accumulated Other Comprehensive
Income (Loss) related to the Hourly Retirement Plan:
 
<TABLE>
<CAPTION>
                                                                             DECEMBER 31,
                                                                           ------------------
                                                                            1997       1998
                                                                           -------    -------
                                                                              (THOUSANDS)
<S>                                                                        <C>        <C>
Change in benefit obligation:
  Benefit obligation at beginning of year...............................   $20,031    $21,718
  Service cost..........................................................       284        313
  Interest cost.........................................................     1,481      1,586
  Actuarial losses......................................................       755      1,298
  Benefits paid.........................................................      (833)      (900)
                                                                           -------    -------
  Benefit obligation at end of year.....................................    21,718     24,015
                                                                           -------    -------
Change in plan assets:
  Fair value of plan assets at beginning of year........................    19,076     21,426
  Actual return on plan assets..........................................     1,833       (358)
  Employer contributions................................................     1,350        840
  Benefits paid.........................................................      (833)      (900)
                                                                           -------    -------
  Fair value of plan assets at end of year..............................    21,426     21,008
                                                                           -------    -------
Reconciliation of funded status:
  Funded status.........................................................      (292)    (3,007)
  Unrecognized prior service cost.......................................     1,409      1,235
  Unrecognized actuarial losses.........................................       693      4,716
                                                                           -------    -------
  Net amount recognized in Consolidated Balance Sheets..................   $ 1,810    $ 2,944
                                                                           -------    -------
                                                                           -------    -------
Amounts recognized in Consolidated Balance Sheets:
  Accrued benefit cost..................................................   $  (292)   $(3,007)
  Intangible asset......................................................     1,409      1,235
  Accumulated other comprehensive (income) loss.........................       693      4,716
                                                                           -------    -------
  Net amount recognized.................................................   $ 1,810    $ 2,944
                                                                           -------    -------
                                                                           -------    -------
Change for the year in accumulated other comprehensive (income) loss:
  Change in intangible asset............................................   $  (207)   $   174
  Change in additional minimum liability................................       901      3,849
                                                                           -------    -------
  Total.................................................................   $   693    $ 4,023
                                                                           -------    -------
                                                                           -------    -------
</TABLE>
 
     In determining the projected benefit obligation, the weighted average
assumed discount rate was 7.25% and 7% for 1997 and 1998, respectively. The
expected long-term rate of return on assets, used in determining net periodic
pension cost (income), was 11% for 1997 and 1998.
 
     The Company also provides a nonqualified defined benefit retirement plan
for certain key employees. Expense accrued for this plan was $0.6, $0.6 and
$1.0 million for 1996, 1997 and 1998, respectively.
 
  Postretirement Medical and Life Insurance
 
     The Company generally does not provide postretirement medical and life
insurance benefits, although it subsidizes such benefits for certain employees
and certain retirees. Such subsidies were reduced or ended as of January 1,
1997.
 
                                      F-30
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 10. BENEFIT PLANS--(CONTINUED)
     The net periodic postretirement benefit cost included the following
components:
 
<TABLE>
<CAPTION>
                                                                                 YEAR ENDED DECEMBER 31,
                                                                                 -----------------------
                                                                                 1996     1997     1998
                                                                                 -----    -----    -----
                                                                                       (THOUSANDS)
<S>                                                                              <C>      <C>      <C>
Service cost..................................................................   $   4    $   4    $   6
Interest cost.................................................................     805      752      619
Amortization of unrecognized prior service cost...............................     (39)    (179)    (179)
                                                                                 -----    -----    -----
Net periodic postretirement benefit cost......................................   $ 770    $ 577    $ 446
                                                                                 -----    -----    -----
                                                                                 -----    -----    -----
</TABLE>
 
     The following table sets forth, for the years 1997 and 1998,
reconciliations of the beginning and ending balances of the postretirement
benefit obligation, funded status and amounts recognized in the Consolidated
Balance Sheets related to postretirement medical and life insurance benefits:
 
<TABLE>
<CAPTION>
                                                                             DECEMBER 31,
                                                                          --------------------
                                                                            1997        1998
                                                                          --------    --------
                                                                              (THOUSANDS)
<S>                                                                       <C>         <C>
Change in benefit obligation:
  Benefit obligation at beginning of year..............................   $ 10,205    $ 10,324
  Service cost.........................................................          4           6
  Interest cost........................................................        752         619
  Actuarial (gains) losses.............................................        214        (968)
  Benefits paid........................................................       (851)       (732)
                                                                          --------    --------
  Benefit obligation at end of year....................................     10,324       9,249
                                                                          --------    --------
Change in plan assets:
  Fair value of plan assets at beginning of year.......................         --          --
  Employer contributions...............................................        851         732
  Benefits paid........................................................       (851)       (732)
                                                                          --------    --------
  Fair value of plan assets at end of year.............................         --          --
                                                                          --------    --------
Reconciliation of funded status:
  Funded status........................................................    (10,324)     (9,249)
  Unrecognized prior service cost......................................     (1,333)     (1,154)
  Unrecognized actuarial losses........................................      1,153         185
                                                                          --------    --------
  Net amount recognized in Consolidated Balance Sheets as accrued
     benefit cost......................................................   $(10,504)   $(10,218)
                                                                          --------    --------
                                                                          --------    --------
</TABLE>
 
     For purposes of calculating the accumulated postretirement benefit
obligation, the following assumptions were made. Retirees as of December 31,
1998 who were formerly salaried employees (with certain exceptions) were assumed
to receive a Company subsidy of $700 to $1,000 per year. For retirees over age
65, this subsidy may be replaced by participation in a managed care program.
With respect to retirees who were formerly hourly employees, most such retirees
are subject to a $5,000 per person lifetime maximum benefit. Subject to such
lifetime maximum, a 12% and 6% annual rate of increase in the Company's per
capita cost of providing postretirement medical benefits was assumed for 1998
for such retirees under and over age 65, respectively. To the extent that the
lifetime maximum benefits have not been reached, the foregoing rates were
assumed to decrease gradually to an ultimate rate of 7% and 6%, respectively, by
the year 2003 and remain at that level thereafter. The weighted average assumed
discount rate used in determining the accumulated postretirement benefit
obligation was 7.25% and 7% for 1997 and 1998, respectively.
 
                                      F-31
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 10. BENEFIT PLANS--(CONTINUED)
     The health care cost trend rate assumption has an effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend rates by
one percentage point in each year would increase the accumulated postretirement
benefit obligation as of December 31, 1997 and 1998 by $416,000 and $419,000,
respectively, and the aggregate of the service and interest cost components of
the net periodic postretirement benefit cost for the years 1997 and 1998 by
$34,000 and $30,000, respectively. A decrease of one percentage point in each
year would decrease the accumulated postretirement benefit obligation as of
December 31, 1998 by $373,000 and the aggregate of the service and interest cost
components of the net periodic postretirement benefit cost for the year 1998 by
$27,000.
 
NOTE 11. STOCK OPTION PLANS AND STOCK APPRECIATION RIGHTS
 
     The 1991 Incentive Plan for Key Employees and Directors, as amended (the
"Plan"), authorizes the grant of options to purchase a maximum of 9,000,000
shares of the Company's common stock. The Compensation Committee of the Board of
Directors (the "Committee") determines the exercise price and vesting schedule
of options granted under the Plan. In 1996, 1997 and 1998, the Company granted
options to certain employees to purchase 338,645, 264,344 and 2,029,301 shares,
respectively, of the Company's common stock at exercise prices ranging from
$.625 to $5.625 below the fair market value of such shares on the date of grant.
The difference between the exercise price and the fair market value of such
shares on the date of grant is recognized as compensation expense over the
vesting periods of 2 1/2 to 3 years. Compensation expense for such options was
$0.3, $0.7 and $1.9 million in 1996, 1997 and 1998, respectively. All other
employee options granted under the Plan have a term of nine years, have an
exercise price equal to the fair market value of such shares on the date of
grant and become exercisable at a rate determined by the Committee at the time
of grant. Special vesting rules apply to options granted to non-employee
directors.
 
     The Company has elected the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," and applies APB Opinion No. 25 and
related interpretations in accounting for the Plan. If the Company had elected
to recognize compensation cost based on the fair value of awards under the Plan
at grant dates, the Company's pro forma net income for the years 1996, 1997 and
1998 would have been $53.2, $51.8 and $2.2 million, respectively, and pro forma
basic earnings per share would have been $.99, $.96 and $.04, respectively. The
SFAS No. 123 method of accounting has not been applied to options granted prior
to January 1, 1995, and the resulting pro forma compensation expense may not be
indicative of pro forma expense in future years.
 
     The fair value of the Company's stock options used to compute pro forma net
income and earnings per share is the estimated present value at the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: risk-free interest rate of 6%; expected life of
6 years; expected volatility of 24%; and dividend yield of 0%.
 
                                      F-32
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 11. STOCK OPTION PLANS AND STOCK APPRECIATION RIGHTS--(CONTINUED)
     The following is a summary of transactions pertaining to the Plan:
 
<TABLE>
<CAPTION>
                                              YEAR ENDED             YEAR ENDED             YEAR ENDED
                                           DECEMBER 31, 1996      DECEMBER 31, 1997      DECEMBER 31, 1998
                                          -------------------    -------------------    -------------------
                                                     WEIGHTED               WEIGHTED               WEIGHTED
                                                     AVERAGE                AVERAGE                AVERAGE
                                          SHARES     EXERCISE    SHARES     EXERCISE    SHARES     EXERCISE
                                          (000'S)     PRICE      (000'S)     PRICE      (000'S)     PRICE
                                          -------    --------    -------    --------    -------    --------
<S>                                       <C>        <C>         <C>        <C>         <C>        <C>
Outstanding, January 1.................     3,277     $ 7.86       5,014     $ 9.32       4,733     $ 9.68
Granted................................     2,110      11.31         515      11.99       3,117      15.05
Exercised..............................      (113)      6.90        (306)      8.08        (351)      7.70
Forfeited..............................      (260)      8.17        (490)      9.37        (510)     11.19
                                          -------                -------                -------
Outstanding, December 31...............     5,014       9.32       4,733       9.68       6,989      12.06
                                          -------                -------                -------
                                          -------                -------                -------
Options exercisable, December 31.......     1,140       8.45       1,294       8.37       2,190      10.63
                                          -------                -------                -------
                                          -------                -------                -------
</TABLE>
 
     Based on calculations using the Black-Scholes option-pricing model, the
weighted-average fair value of options granted in 1996, 1997 and 1998 under the
Plan for which the exercise price equaled the fair market value of such shares
on the date of grant was $3.50, $4.17 and $4.40 per share, respectively, and
such weighted average fair value of options granted in 1996, 1997 and 1998 for
which the exercise price was less than the fair market value of such shares on
the date of grant was $5.99, $7.93 and $6.42 per share, respectively.
 
     The following is a summary of the status of stock options outstanding and
exercisable under the Plan as of December 31, 1998:
 
<TABLE>
<CAPTION>
                                                            STOCK OPTIONS
                                                             OUTSTANDING                   STOCK OPTIONS
                                                  ----------------------------------        OUTSTANDING
                                                                          WEIGHTED      -------------------
                                                             WEIGHTED      AVERAGE                 WEIGHTED
                                                             AVERAGE      REMAINING                AVERAGE
RANGE OF                                          SHARES     EXERCISE    CONTRACTUAL    SHARES     EXERCISE
EXERCISE PRICES                                   (000'S)     PRICE         LIFE        (000'S)     PRICE
-----------------------------------------------   -------    --------    -----------    -------    --------
<S>                                               <C>        <C>         <C>            <C>        <C>
$ 5.00-$ 7.50..................................     1,250     $ 6.71     4.04 years         890     $ 6.63
$ 7.51-$11.25..................................     1,198       9.28     5.68 years         340       8.88
$11.26-$16.88..................................     4,485      14.21     7.67 years         960      14.96
$16.89-$18.63..................................        56      18.33     8.45 years          --         --
                                                  -------                               -------
Total..........................................     6,989      12.06     6.69 years       2,190      10.63
                                                  -------                               -------
                                                  -------                               -------
</TABLE>
 
     ISP Holdings issued options in 1996 to certain employees to purchase
138,983 shares of ISP Holdings' redeemable convertible preferred stock
("Preferred Stock"), exercisable at a price of $111.44 per share. Each share of
Preferred Stock was convertible, at the holder's option, into shares of common
stock of ISP Holdings at a formula price based on the sum of the determined
initial Book Value (as defined) plus interest on such Book Value at a specified
rate. The options vested over seven years, subject to earlier vesting under
certain circumstances including in connection with a change of control.
 
     ISP Holdings also issued stock appreciation rights ("SARs") in 1996 related
to 27,748 shares of ISP Holdings' common stock. The SARs represented the right
to receive a cash payment based upon the appreciation in value of the specified
number of shares of common stock of ISP Holdings over the sum of the determined
initial Book Value (as defined) per share of common stock of ISP Holdings plus
interest on such Book Value at a specified rate. The SARs vested over a
five-year period, subject to earlier vesting under certain circumstances
including in connection with a change of control. Compensation expense related
to SARs was $0 for 1996 and $1.3 million for 1997.
 
                                      F-33
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 11. STOCK OPTION PLANS AND STOCK APPRECIATION RIGHTS--(CONTINUED)
     As a result of the Merger (see Note 1), ISP Holdings' Preferred Stock
option and SAR programs were terminated, and the Company charged $7.9 million
against operating income for cash payments made in 1998 for amounts vested at
that time. Additional accruals totaling $3.1 million may be made over the
remaining vesting period from the date of the Merger through 2003, including
$0.8 million accrued in 1998 after the Merger.
 
NOTE 12. RELATED PARTY TRANSACTIONS
 
     BMCA, an indirect subsidiary of GAF and an affiliate of the Company, and
its subsidiaries purchase all of their colored roofing granules requirements
from the Company (except for the requirements of their California and Oregon
roofing plants and a portion of their Indiana roofing plant, which are supplied
by a third party) under a requirements contract. Effective January 1, 1999, this
contract was amended to cover, among other things, purchases of colored roofing
granules by BMCA's subsidiaries and was renewed for 1999. This contract is
subject to annual renewal unless terminated by either party to such agreement.
In 1998, BMCA and its subsidiaries purchased a total of $62.6 million of mineral
products from the Company, representing 7.6% of the Company's total net sales
and 66.2% of the Company's net sales of mineral products. Sales by the Company
to BMCA and its subsidiaries totaled $50.5 and $51.1 million for 1996 and 1997,
respectively. The receivable from BMCA and its subsidiaries for sales of mineral
products as of December 31, 1997 and 1998 was $2.8 and $5.6 million,
respectively.
 
     Pursuant to a management agreement (the "Management Agreement"), the
Company has provided certain general management, administrative, legal,
telecommunications, information and facilities services to certain of its
affiliates, including GAF, BMCA, G-I Holdings and GFC. Charges by the Company
for providing such services aggregated $6.2, $5.6 and $5.1 million for 1996,
1997 and 1998, respectively, and are reflected as reductions of "Selling,
general and administrative" expense. Such charges consist of management fees and
other reimbursable expenses attributable to, or incurred by the Company for the
benefit of, the respective parties, which are based on an estimate of the costs
the Company incurs to provide such services. Effective January 1, 1999, the term
of the Management Agreement was extended through the end of 1999, and the
management fees payable by BMCA thereunder were increased. The Company and BMCA
also allocate a portion of the management fees payable by BMCA under the
Management Agreement to separate lease payments for the use of BMCA's
headquarters. Based on the services provided by the Company in 1998 under the
Management Agreement, the aggregate amount payable to the Company under the
Management Agreement for 1999 is expected to be approximately $6.1 million.
 
NOTE 13. BUSINESS SEGMENT INFORMATION
 
     The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for companies
to report information about operating segments in annual financial statements,
based on the approach that management utilizes to organize the segments within
the Company for management reporting and decision making. Business segment and
geographic disclosures (see Note 14) for prior periods have been restated to
comply with SFAS No. 131.
 
     The Company is a leading multinational manufacturer of a broad spectrum of
specialty chemicals, mineral products and filter products. In addition to the
Mineral Products and Filter Products segments, the Company operates its
Specialty Chemicals business through three reportable business segments,
organized based upon the markets for their products and the internal management
of the Company, as follows:
 
     Personal Care products serve as critical ingredients in the formulation of
many well-known skin care, hair care, toiletry and cosmetic products. Skin care
ingredients include sunscreen actives, waterproofing agents, preservatives,
emollients and moisturizers. Hair care ingredients include a number of specially
formulated fixative resins for hairsprays, mousses and gels, as well as
thickeners and stabilizers for shampoos and conditioners.
 
                                      F-34
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 13. BUSINESS SEGMENT INFORMATION--(CONTINUED)
     Pharmaceutical, Agricultural and Beverage products are sold to these three
government-regulated industries. In the pharmaceutical market, the Company's
products serve as key ingredients in prescription and over-the-counter tablets,
injectables, cough syrups, antiseptics, toothpastes and denture adhesives. The
Company is a leading producer of inert ingredients for the agricultural
industry, where the Company's solvents and polymers are used for the formulation
of safer and more effective crop treatment products. The Company's specialty
polymers serve the beverage market by assuring the clarity and extending the
shelf life of beer, wine and fruit juices.
 
     Performance Chemicals, Fine Chemicals and Industrial.  The Company's
Performance Chemicals business includes acetylene-based polymers, vinyl ether
monomers, and advanced materials for industrial applications. The Company's
acetylene-based chemistry produces a number of performance polymers for use in a
wide range of industrial markets including coatings, adhesives, imaging,
detergents, electronics, and metalworking. The Company manufactures a broad
range of Fine Chemicals including bulk pharmaceuticals, pharmaceutical
intermediates, and pheromones for use in insect population measurement and
control. The Company's Industrial business markets several intermediate and
solvent products, such as butanediol, tetrahydrofuran (THF) and N-methyl
pyrrolidone (NMP), which are sold primarily to industrial markets for use in
high performance plastics, lubricating oil and chemical processing, electronics
cleaning, and coatings.
 
     Mineral Products.  The Company manufactures ceramic-coated colored roofing
granules that are sold primarily to the North American roofing industry for use
in the production of asphalt roofing shingles.
 
     Filter Products.  The Company manufactures a complete line of filter
systems for use in the macroscopic filtration of process liquids. Serving
primarily the paint, automotive, chemical, pharmaceutical, petroleum, and food
and beverage industries, the Company is a global supplier of pressure-rated bag
filtration equipment.
 
     The following segment data are presented based on the Company's internal
management reporting system for the five reportable business segments. The
Company evaluates segment performance based on operating income. Therefore, the
measure of profit or loss that is reported to management for each segment is
operating income. Interest expense, other income items, income taxes and
extraordinary items are not allocated to the business segments for management
reporting. At this time, the Company's internal management reporting system does
not report assets by segment for the three specialty chemicals reportable
segments (Personal Care; Pharmaceutical, Agricultural and Beverage; and
Performance Chemicals, Fine Chemicals and Industrial), as many of the Company's
plant assets are utilized by several of the segments. Therefore, the following
asset-related segment data are presented only for Specialty Chemicals, Mineral
Products and Filter Products.
 
                                      F-35
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 13. BUSINESS SEGMENT INFORMATION--(CONTINUED)
 
     Sales of Mineral Products to BMCA and its subsidiaries in 1996, 1997 and
1998 accounted for 59.0%, 61.5% and 66.2%, respectively, of the Company's net
sales of Mineral Products, representing 7.1%, 6.8% and 7.6%, respectively, of
the Company's total net sales. No other customer accounted for more than 5% of
the Company's total net sales in 1996, 1997 or 1998.
 
<TABLE>
<CAPTION>
                                                                                     YEAR ENDED DECEMBER 31,
                                                                                 -------------------------------
                                                                                   1996       1997       1998
                                                                                 ---------  ---------  ---------
                                                                                           (MILLIONS)
<S>                                                                              <C>        <C>        <C>
Net sales:
  Personal Care................................................................  $   190.7  $   187.4  $   189.4
  Pharmaceutical, Agricultural and Beverage....................................      194.9      208.4      210.6
  Performance Chemicals, Fine Chemicals and Industrial.........................      205.7      230.0      290.1
                                                                                 ---------  ---------  ---------
     Total Specialty Chemicals.................................................      591.3      625.8      690.1
  Mineral Products(1)..........................................................       85.6       83.1       94.5
  Filter Products..............................................................       39.6       40.3       39.3
                                                                                 ---------  ---------  ---------
Net sales......................................................................  $   716.5  $   749.2  $   823.9
                                                                                 ---------  ---------  ---------
                                                                                 ---------  ---------  ---------
Operating income:
  Personal Care................................................................  $    47.6  $    44.0  $    34.7
  Pharmaceutical, Agricultural and Beverage....................................       44.6       46.6       45.8
  Performance Chemicals, Fine Chemicals and Industrial.........................       27.1       31.9       54.7
                                                                                 ---------  ---------  ---------
     Total Specialty Chemicals.................................................      119.3      122.5      135.2
  Mineral Products.............................................................       16.5       17.0       20.5
  Filter Products..............................................................        0.2        3.6        3.6
                                                                                 ---------  ---------  ---------
     Total segment operating income............................................      136.0      143.1      159.3
  Unallocated corporate office expenses........................................         --       (1.9)      (3.7)
  Restructuring and impairment loss(2).........................................         --         --      (73.0)
  Merger-related expenses......................................................         --         --      (12.8)
                                                                                 ---------  ---------  ---------
     Total operating income....................................................      136.0      141.3       69.8
Interest expense and other, net................................................      (19.4)     (33.5)     (39.4)
                                                                                 ---------  ---------  ---------
Income from continuing operations before income taxes and extraordinary loss...  $   116.6  $   107.8  $    30.4
                                                                                 ---------  ---------  ---------
                                                                                 ---------  ---------  ---------
Assets:
  Specialty Chemicals(3).......................................................  $   963.8  $   985.7  $ 1,050.3
  Mineral Products.............................................................      154.5      155.2      157.6
  Filter Products..............................................................       22.0       23.3       26.4
  General Corporate(4).........................................................      253.4      321.5      531.3
  Net current assets of discontinued operations................................      206.7         --         --
                                                                                 ---------  ---------  ---------
Total assets...................................................................  $ 1,600.4  $ 1,485.7  $ 1,765.6
                                                                                 ---------  ---------  ---------
                                                                                 ---------  ---------  ---------
Capital expenditures and acquisitions:
  Specialty Chemicals..........................................................  $    41.9  $    56.3  $   153.7
  Mineral Products.............................................................        9.5       11.2       10.1
  Filter Products..............................................................        3.2        1.0        2.2
  Unallocated corporate office.................................................         --        0.2         --
                                                                                 ---------  ---------  ---------
Total..........................................................................  $    54.6  $    68.7  $   166.0
                                                                                 ---------  ---------  ---------
                                                                                 ---------  ---------  ---------
Depreciation and goodwill amortization:
  Specialty Chemicals..........................................................  $    41.4  $    44.0  $    50.3
  Mineral Products.............................................................        9.6       10.1       11.8
  Filter Products..............................................................        0.5        0.6        0.8
  Unallocated corporate office.................................................         --        0.5        2.2
                                                                                 ---------  ---------  ---------
Total..........................................................................  $    51.5  $    55.2  $    65.1
                                                                                 ---------  ---------  ---------
                                                                                 ---------  ---------  ---------
</TABLE>
 
------------------
(1) Includes sales to BMCA and its subsidiaries of $50.5, $51.1 and
    $62.6 million for 1996, 1997 and 1998, respectively.
 
                                              (Footnotes continued on next page)
 
                                      F-36
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 13. BUSINESS SEGMENT INFORMATION--(CONTINUED)
(Footnotes continued from previous page)
(2) Of the $73.0 million restructuring and impairment loss in 1998,
    $70.0 million relates to the Performance Chemicals, Fine Chemicals and
    Industrial business segment. The remaining $3.0 million provision relates to
    the consolidation of European offices and affects all business segments
    except Mineral Products.
 
(3) Identifiable assets of Specialty Chemicals as of December 31, 1996 and 1997
    include the Company's 50% ownership of GhC. See Notes 2 and 5.
 
(4) General Corporate assets primarily represent the Company's investments in
    trading, available-for-sale and held-to-maturity securities and other
    short-term investments, which are held for general corporate purposes and
    are not allocated to industry segments.
 
NOTE 14. GEOGRAPHIC INFORMATION
 
     Financial information set forth below for foreign operations represent
sales and long-lived assets (property, plant and equipment) of foreign-based
subsidiaries. Net sales are attributed to countries based on location of
customers and reflect the Company's internal management reporting system.
 
<TABLE>
<CAPTION>
                                                                                           YEAR ENDED DECEMBER 31,
                                                                                       -------------------------------
                                                                                         1996       1997       1998
                                                                                       ---------  ---------  ---------
                                                                                                 (MILLIONS)
<S>                                                                                    <C>        <C>        <C>
Net sales:
  North America:
     United States...................................................................  $   350.6  $   376.9  $   413.0
     Canada..........................................................................       14.4       15.8       17.5
                                                                                       ---------  ---------  ---------
       Total North America...........................................................      365.0      392.7      430.5
                                                                                       ---------  ---------  ---------
  Europe:
     Germany(1)......................................................................       49.1       39.0       93.0
     United Kingdom..................................................................       39.5       39.2       39.1
     France..........................................................................       23.9       22.7       23.8
     Italy...........................................................................       14.9       17.2       16.8
     Switzerland.....................................................................       10.8       14.7       13.2
     Other European countries........................................................       75.0       70.1       71.9
                                                                                       ---------  ---------  ---------
       Total Europe..................................................................      213.2      202.9      257.8
                                                                                       ---------  ---------  ---------
  Asia-Pacific:
     Japan...........................................................................       36.4       39.5       26.3
     Australia.......................................................................       12.6       12.7       12.1
     Taiwan..........................................................................        9.6       14.0       13.7
     Other Asia-Pacific countries....................................................       44.4       46.4       40.3
                                                                                       ---------  ---------  ---------
       Total Asia-Pacific............................................................      103.0      112.6       92.4
                                                                                       ---------  ---------  ---------
  Latin America:
     Brazil..........................................................................       13.7       15.5       16.9
     Mexico..........................................................................        8.5        9.8       12.1
     Other Latin American countries..................................................       13.1       15.7       14.2
                                                                                       ---------  ---------  ---------
       Total Latin America...........................................................       35.3       41.0       43.2
                                                                                       ---------  ---------  ---------
Total net sales......................................................................  $   716.5  $   749.2  $   823.9
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
</TABLE>
 
                                      F-37
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 14. GEOGRAPHIC INFORMATION--(CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                                DECEMBER 31,
                                                                                       -------------------------------
                                                                                         1996       1997       1998
                                                                                       ---------  ---------  ---------
                                                                                                 (MILLIONS)
<S>                                                                                    <C>        <C>        <C>
Property, Plant and Equipment:
  United States......................................................................  $   473.8  $   501.9  $   479.6
  Germany(2).........................................................................        0.4        0.4       53.6
  All other foreign countries........................................................       15.3       16.6       20.0
                                                                                       ---------  ---------  ---------
Total Property, Plant and Equipment..................................................  $   489.5  $   518.9  $   553.2
                                                                                       ---------  ---------  ---------
                                                                                       ---------  ---------  ---------
</TABLE>
 
------------------
(1) Net sales for Germany for 1996 and 1997 do not include sales of the GhC
    joint venture, which was accounted for by the equity method prior to the
    Company's acquisition, effective April 1, 1998, of the remaining 50%
    interest in GhC. See Notes 2 and 5.
 
(2) The Company's other principal long-lived asset in Germany as of
    December 31, 1996 and 1997 was the 50% ownership of GhC of $38.2 and
    $34.3 million, respectively. See Notes 2 and 5.
 
     Approximately 50% of the Company's sales in 1998 were in foreign countries
which are subject to currency exchange rate fluctuation risks. See Note 2 for a
discussion of the Company's policy to manage these risks. Certain countries in
which the Company has sales are subject to additional risks, including high
rates of inflation, exchange controls, government expropriation and general
instability.
 
NOTE 15. DISCONTINUED OPERATIONS
 
     On August 1, 1996, ISP Holdings completed the sale of WAXQ--FM, a
commercial radio station operated by GAF Broadcasting Company, Inc. ("GAF
Broadcasting"), which was a wholly-owned subsidiary of ISP Holdings, for a
purchase price of $90.0 million. The gain on disposal of $43.6 million, after
income taxes of $30.6 million, was recorded in the third quarter of 1996.
Accordingly, GAF Broadcasting is reported as a discontinued operation.
 
     As a result of the Separation Transactions, G-I Holdings and its remaining
assets, principally the building materials business, consisting of BMCA and U.S.
Intec, and the assets and liabilities of GFC, as well as GAF Broadcasting, are
reflected as discontinued operations in the Consolidated Financial Statements
for periods prior to the Separation Transactions. Summary operating results of
such discontinued operations are as follows:
 
<TABLE>
<CAPTION>
                                                                              YEAR ENDED
                                                                              DECEMBER 31,
                                                                                 1996
                                                                              ------------
                                                                              (THOUSANDS)
<S>                                                                           <C>
Net sales..................................................................     $856,200
                                                                                --------
                                                                                --------
Loss before income taxes...................................................     $(28,015)
Income tax benefit.........................................................        8,425
                                                                                --------
Loss from discontinued operations(1).......................................     $(19,590)
                                                                                --------
                                                                                --------
</TABLE>
 
------------------
(1) Loss from discontinued operations is net of elimination of intercompany
    interest, net of income taxes.
 
     In February 1996, G-I Holdings completed the exchange of $189.3 million in
accreted value of its then-outstanding Discount Notes, for $200 million of its
10% Notes, which were subsequently subject to the Exchange Offer discussed in
Note 9. As discussed in Note 9, on October 18, 1996, ISP Holdings consummated
the Tender Offer for G-I Holdings' Discount Notes. Pursuant to the Tender Offer,
$346.9 million in accreted value of G-I Holdings' Discount Notes were purchased
by ISP Holdings and $133.0 million in accreted value of such Discount Notes were
subsequently repurchased by G-I Holdings (utilizing cash on hand and the
repayment of
 
                                      F-38
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 15. DISCONTINUED OPERATIONS--(CONTINUED)
monies owed to G-I Holdings by ISP) from ISP Holdings. G-I Holdings also
purchased additional Discount Notes from ISP Holdings for an aggregate cash
purchase price of $45.8 million, representing the sum of $45.0 million plus an
amount sufficient to pay ISP Holdings' fees and expenses related to the
Separation Transactions (to the extent not previously included in the repurchase
of Discount Notes by G-I Holdings). ISP Holdings also concluded an offer to
exchange its 9 3/4% Senior Notes for G-I Holdings' 10% Notes. Pursuant to the
Exchange Offer, $199.9 million of G-I Holdings' 10% Notes were acquired by ISP
Holdings.
 
     All Discount Notes purchased in the Tender Offer (other than those Discount
Notes sold to G-I Holdings, as discussed above) and all 10% Notes accepted in
the Exchange Offer by ISP Holdings were contributed to G-I Holdings by ISP
Holdings as a capital contribution in December 1996, prior to the Separation
Transactions, and canceled by G-I Holdings.
 
     In connection with these transactions, the Company recorded extraordinary
losses of $31.0 million, net of related income tax benefits of $17.3 million,
representing write-offs of deferred financing fees and the premium to accreted
value of $29.4 million paid pursuant to the Tender Offer.
 
NOTE 16. COMMITMENTS AND CONTINGENCIES
 
  Asbestos Litigation Against GAF
 
     GAF has advised the Company that, as of December 28, 1998, it is defending
approximately 113,800 pending lawsuits involving alleged asbestos-related bodily
injury claims relating to the inhalation of asbestos fiber ("Asbestos Claims")
(having received notice of approximately 93,500 new Asbestos Claims during 1998)
and has resolved approximately 293,500 Asbestos Claims (including approximately
59,000 in 1998). GAF has advised the Company that it believes that a significant
portion of the claims filed in 1998 were already pending against other
defendants for some period of time, with GAF being added as a defendant upon the
lifting in 1997 of the injunction relating to the Georgine class action
settlement. This injunction prevented plaintiffs from filing or proceeding with
their Asbestos Claims other than in accordance with the Georgine class action
settlement, which was rendered inoperable in 1997 by a United States Supreme
Court ruling. GAF's current estimated average cost for Asbestos Claims resolved
in 1998 (including Asbestos Claims disposed of at no cost to GAF) is
approximately $3,500 per claim. Substantially all of the costs in respect of
these Asbestos Claims will be paid over several years. There can be no assurance
that the actual costs of resolving pending and future Asbestos Claims will
approximate GAF's estimated average costs for the Asbestos Claims resolved in
1998.
 
     GAF has stated that it is committed to effecting a comprehensive resolution
of Asbestos Claims, and that it is exploring a number of options to accomplish
such resolution. There can be no assurance that this effort will be successful.
 
     Neither the Company nor the assets or operations of the Company, which was
operated as a division of a corporate predecessor of GAF prior to July 1986,
have been involved in the manufacture or sale of asbestos products. The Company
believes that it should have no legal responsibility for damages in connection
with asbestos-related claims. Should GAF, however, be unable to satisfy
judgments against it in asbestos-related lawsuits, its judgment creditors might
seek to enforce their judgments against the assets of GAF and, in that regard,
seek to recapture assets distributed by GAF, including assets distributed in the
Separation Transactions. Although the Company does not believe any such action
to unwind the Separation Transactions would be successful, there can be no
assurance in that regard. If a creditor were successful in recapturing assets
distributed in the Separation Transactions, such creditor could seek to enforce
any asbestos-related judgment against GAF's assets, including the capital stock
of the Company, and such enforcement could result in a change of control of the
Company. See Note 9 for discussion of the Credit Agreement.
 
                                      F-39
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 16. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
  Environmental Litigation
 
     The Company, together with other companies, is a party to a variety of
proceedings and lawsuits involving environmental matters ("Environmental
Claims"), in which recovery is sought for the cost of cleanup of contaminated
sites, a number of which Environmental Claims are in the early stages or have
been dormant for protracted periods.
 
     The Company estimates that its liability in respect of all Environmental
Claims (including those relating to its closed Linden, New Jersey plant
described below), as of December 31, 1998, is approximately $20.0 million,
before reduction for insurance recoveries reflected on the Company's balance
sheet (discussed below) of $10.7 million that relate to both past expenses and
estimated future liabilities ("estimated recoveries"). The gross environmental
liability is included within "Accrued liabilities" and "Other liabilities," and
the estimated recoveries are included within "Other current assets" and "Other
assets."
 
     In the opinion of the Company's management, the resolution of the
Environmental Claims should not be material to the business, liquidity, results
of operations, cash flows or financial position of the Company. However, adverse
decisions or events, particularly as to the liability and the financial
responsibility of the Company's insurers and of the other parties involved at
each site and their insurers, could cause the Company to increase its estimate
of its liability in respect of such matters. It is not currently possible to
estimate the amount or range of any additional liability.
 
     After considering the relevant legal issues and other pertinent factors,
the Company believes that it will receive the estimated recoveries and the legal
expenses incurred on the Company's behalf and that the recoveries could be well
in excess of the current estimated liability for all Environmental Claims,
although there can be no assurances in this regard. The Company believes it is
entitled to substantially full defense and indemnity under its insurance
policies for most Environmental Claims, although the Company's insurers have not
affirmed a legal obligation under the policies to provide indemnity for such
claims.
 
     In March 1995, GAF commenced litigation on behalf of itself and its
predecessors, successors, subsidiaries and related corporate entities seeking
amounts substantially in excess of the estimated recoveries. While the Company
believes that its claims are meritorious, there can be no assurance that the
Company will prevail in its efforts to obtain amounts equal to, or in excess of,
the estimated recoveries.
 
     In June 1989, the Company entered into a Consent Order with the New Jersey
Department of Environmental Protection ("NJDEP") requiring the development of a
remediation plan for its closed Linden, New Jersey plant and the maintenance of
financial assurances (currently $7.5 million) to guarantee the Company's
performance. This Consent Order does not address any potential natural resource
damage claims. In April 1993, NJDEP issued orders which require the prevention
of discharge of contaminated groundwater and stormwater from the site and the
elimination of other potential exposure concerns. The Company believes, although
there can be no assurance, that, taking into account its plans for development
of the site, it can comply with the NJDEP order at a cost of no more than
$7.5 million.
 
  Lease Commitments
 
     Leases for certain equipment at the Company's mineral products plants are
accounted for as capital leases and are included in "Property, plant and
equipment, net," at December 31, 1997 and 1998 in the amount of $2.1 and
$2.2 million, respectively. The Company also has operating leases related to the
sale-leaseback transaction discussed in Note 5 and for transportation,
production and data processing equipment and for various buildings. Rental
expense on operating leases was $8.7, $9.7 and $15.2 million for 1996, 1997 and
1998, respectively.
 
                                      F-40
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 16. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Future minimum lease payments for properties which were held under long-term
noncancelable leases as of December 31, 1998 were as follows:
 
<TABLE>
<CAPTION>
                                                                                                CAPITAL    OPERATING
                                                                                                LEASES      LEASES
                                                                                                -------    ---------
                                                                                                    (THOUSANDS)
<S>                                                                                             <C>        <C>
1999.........................................................................................   $   488     $ 9,391
2000.........................................................................................       434       8,326
2001.........................................................................................       339       7,239
2002.........................................................................................       137       6,252
2003.........................................................................................       140       5,893
Later years..................................................................................        --       7,423
                                                                                                -------     -------
Total minimum payments.......................................................................     1,538     $44,524
                                                                                                            -------
                                                                                                            -------
Less interest included above.................................................................       221
                                                                                                -------
Present value of net minimum lease payments..................................................   $ 1,317
                                                                                                -------
                                                                                                -------
</TABLE>
 
  Other Matters
 
     The Company has received site designation from the New Jersey Hazardous
Waste Facilities Siting Commission for the construction of a hazardous waste
treatment, storage and disposal facility at its Linden, New Jersey property and
has received approval from the New Jersey Turnpike Authority for a direct access
ramp from the Turnpike to the site. If the Company is successful in securing the
necessary permits to construct and operate the hazardous waste facility, the
Company intends to develop and operate the facility in a separate subsidiary,
either on its own or in a joint venture with a suitable partner. The Company
estimates that the cost of constructing the facility will be approximately
$100 million and, if approved, the facility is anticipated to be in operation
three years after commencement of construction. The Company anticipates
utilizing internally generated cash and/or seeking project or other independent
financing for this project. Accordingly, the Company would not expect such
facility to impact materially its liquidity or capital resources. The Company is
also investigating additional development opportunities at this site.
 
     See Note 4 for information regarding additional contingencies.
 
NOTE 17. SUBSEQUENT EVENTS
 
     On March 1, 1999, the Company repaid its 9% Senior Notes due March 1999
with $200 million of long-term Credit Agreement borrowings. On March 1, 1999,
the Company also terminated the forward-starting interest rate swaps entered
into in 1998 in the aggregate notional amount of $125 million. The cost to the
Company to terminate such swaps was insignificant. On March 18, 1999, the
Company received a one-year extension, to April 11, 2000, on its $38.1 million
mortgage obligation.
 
                                      F-41
<PAGE>
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
                         SUPPLEMENTARY DATA (UNAUDITED)
                      QUARTERLY FINANCIAL DATA (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                1997 BY QUARTER                         1998 BY QUARTER
                                      ------------------------------------    ------------------------------------
                                      FIRST     SECOND    THIRD     FOURTH    FIRST     SECOND    THIRD     FOURTH
                                      ------    ------    ------    ------    ------    ------    ------    ------
                                                                       (MILLIONS)
<S>                                   <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
Net sales..........................   $191.2    $197.8    $183.6    $176.6    $200.7    $219.8    $206.9    $196.5
Cost of products sold..............    114.2     116.3     105.9     100.5     119.2     125.7     119.6     120.8
                                      ------    ------    ------    ------    ------    ------    ------    ------
Gross profit.......................   $ 77.0    $ 81.5    $ 77.7    $ 76.1    $ 81.5    $ 94.1    $ 87.3    $ 75.7
                                      ------    ------    ------    ------    ------    ------    ------    ------
                                      ------    ------    ------    ------    ------    ------    ------    ------
Operating income (loss)(1).........   $ 36.4    $ 39.0    $ 34.6    $ 31.3    $ 37.8    $ 48.1    $ 23.6    $(39.7)
                                      ------    ------    ------    ------    ------    ------    ------    ------
                                      ------    ------    ------    ------    ------    ------    ------    ------
Income (loss) before income
  taxes............................   $ 25.2    $ 28.8    $ 28.5    $ 25.3    $ 31.2    $ 38.8    $ 18.3    $(57.9)
Income tax (provision) benefit.....     (9.2)    (10.4)    (10.5)     (9.0)    (11.3)    (14.8)     (6.9)     17.7
Minority interest in income of
  subsidiary.......................     (3.8)     (3.9)     (3.6)     (3.4)     (4.2)     (5.0)     (1.1)       --
                                      ------    ------    ------    ------    ------    ------    ------    ------
Net income (loss)..................   $ 12.2    $ 14.5    $ 14.4    $ 12.9    $ 15.7    $ 19.0    $ 10.3    $(40.2)
                                      ------    ------    ------    ------    ------    ------    ------    ------
                                      ------    ------    ------    ------    ------    ------    ------    ------
Earnings per common share(2):
  Basic............................   $  .23    $  .27    $  .27    $  .24    $  .29    $  .35    $  .15    $ (.58)
                                      ------    ------    ------    ------    ------    ------    ------    ------
                                      ------    ------    ------    ------    ------    ------    ------    ------
  Diluted..........................   $  .23    $  .27    $  .27    $  .24    $  .29    $  .35    $  .15    $ (.58)
                                      ------    ------    ------    ------    ------    ------    ------    ------
                                      ------    ------    ------    ------    ------    ------    ------    ------
</TABLE>
 
------------------
(1) Operating income for the third quarter of 1998 reflects $12.8 million of
    merger-related expenses and $3.0 million of restructuring charges related to
    the consolidation of offices in the Company's European operations. Operating
    income (loss) for the fourth quarter of 1998 reflects $70.0 million of
    restructuring and impairment losses. See Note 3 to Consolidated Financial
    Statements.
 
(2) Earnings per share are calculated separately for each quarter and the full
    year. Accordingly, annual earnings per share will not necessarily equal the
    total of the quarters. Earnings per share for all periods prior to the
    Merger are calculated based on the 53,833,333 shares of the Company's common
    stock held by ISP Holdings' stockholders. See Note 1 to Consolidated
    Financial Statements.
 
                                      F-42
<PAGE>
                                                                     SCHEDULE II
 
                     INTERNATIONAL SPECIALTY PRODUCTS INC.
                       VALUATION AND QUALIFYING ACCOUNTS
                          YEAR ENDED DECEMBER 31, 1996
                                  (THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                  BALANCE      CHARGED TO                   BALANCE
                                                                 JANUARY 1,    COSTS AND                   DECEMBER 31,
DESCRIPTION                                                        1996        EXPENSES      DEDUCTIONS       1996
--------------------------------------------------------------   ----------    ----------    ----------    ------------
<S>                                                              <C>           <C>           <C>           <C>
Valuation and Qualifying Accounts
  Deducted from Assets to Which
  They Apply:
     Allowance for doubtful accounts..........................    $  2,879       $  272        $  311(a)     $  2,840
     Reserve for inventory market valuation...................      13,978        8,329         9,495          12,812
</TABLE>
 
                          YEAR ENDED DECEMBER 31, 1997
                                  (THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                  BALANCE      CHARGED TO                   BALANCE
                                                                 JANUARY 1,    COSTS AND                   DECEMBER 31,
DESCRIPTION                                                        1997        EXPENSES      DEDUCTIONS       1997
--------------------------------------------------------------   ----------    ----------    ----------    ------------
<S>                                                              <C>           <C>           <C>           <C>
Valuation and Qualifying Accounts
  Deducted from Assets to Which
  They Apply:
     Allowance for doubtful accounts..........................    $  2,840       $  338        $  454(a)     $  2,724
     Reserve for inventory market valuation...................      12,812        7,631         6,360          14,083
</TABLE>
 
                          YEAR ENDED DECEMBER 31, 1998
                                  (THOUSANDS)
 
<TABLE>
<CAPTION>
                                                          BALANCE      CHARGED TO                            BALANCE
                                                         JANUARY 1,    COSTS AND                            DECEMBER 31,
DESCRIPTION                                                1998        EXPENSES      DEDUCTIONS    OTHER       1998
------------------------------------------------------   ----------    ----------    ----------    -----    ------------
<S>                                                      <C>           <C>           <C>           <C>      <C>
Valuation and Qualifying Accounts
  Deducted from Assets to Which
  They Apply:
     Allowance for doubtful accounts..................    $  2,724      $    258       $  291(a)   $ 98(b)    $  2,789
     Reserve for inventory market valuation...........      14,083        15,595        7,762       127(b)      22,043
     Reserves for restructuring.......................          --        10,503        1,161        --          9,342
</TABLE>
 
------------------
Notes:
 
(a) Represents write-off of uncollectible accounts net of recoveries.
 
(b) Represents balance acquired in acquisitions.
 
                                      S-1
<PAGE>
                                EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                                                 DESCRIPTIONS
------   ---------------------------------------------------------------------------------------------------------
<S>      <C>
  3.1    -- Amended and Restated Certificate of Incorporation of ISP (incorporated by reference to Exhibit 4.1 to
            Post-Effective Amendment No. 1 on Form S-8 to the Registration Statement on Form S-4 of ISP
            (Registration No. 333-53709) (the "ISP Registration Statement")).
 
  3.2    -- By-laws of ISP (incorporated by reference to Exhibit 99.2 to the ISP Registration Statement).
 
  4.1    -- 9% Note Indenture, dated as of October 18, 1996, between ISP Holdings and The Bank of New York, as
            trustee (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4 of ISP
            Holdings (Registration No. 333-17827) (the "Holdings Registration Statement")).
 
  4.2    -- 9 3/4% Note Indenture, dated as of October 18, 1996, between ISP Holdings and The Bank of New York, as
            trustee (incorporated by reference to Exhibit 4.2 to the Holdings Registration Statement).
 
 10.1    -- Amended and Restated Management Agreement, dated as of January 1, 1999, among GAF Corporation, G-I
            Holdings Inc., G Industries Corp., Merick Inc., GAF Fiberglass Corporation, ISP, GAF Building
            Materials Corporation, GAF Broadcasting Company, Inc., BMCA and ISP Opco Holdings Inc (incorporated by
            reference to Exhibit 10.1 to BMCA's Annual Report on Form 10-K for the year ended December 31, 1998).
 
 10.2    -- Indemnification Agreement, dated as of October 18, 1996, among GAF Corporation, G-I Holdings Inc., ISP
            Holdings, G Industries Corp. and GAF Fiberglass Corporation (incorporated by reference to
            Exhibit 10.7 to the Holdings Registration Statement).
 
 10.3    -- Tax Sharing Agreement, dated as of January 1, 1997, among ISP Holdings, International Specialty
            Products Inc. and certain subsidiaries of International Specialty Products Inc. (incorporated by
            reference to Exhibit 10.8 to the Holdings Registration Statement).
 
10 .4    -- Non-Qualified Retirement Plan Letter Agreement (incorporated by reference to Exhibit 10.11 to the
            Registration Statement on Form S-1 of International Specialty Products Inc. (Registration
            No. 33-40351)).*
</TABLE>

<PAGE>
<TABLE>
<S>      <C>
 10.5    -- International Specialty Products Inc. 1991 Incentive Plan for Key Employees and Directors, as amended
            (incorporated by reference to Exhibit 4.3 to Post-Effective Amendment No. 1 on Form S-8 to the ISP
            Registration Statement).*
 
 10.6    -- Agreement, dated July 30, 1993, between International Specialty Products Inc. and Carl R. Eckardt
            (incorporated by reference to Exhibit 10.16 to the Registration Statement on Form S-4 of G-I Holdings
            Inc. (Registration No. 33-72220)).*
 
 10.7    -- Letter Agreement, dated October 15, 1996, between GAF Corporation and Dr. Peter Heinze (incorporated
            by reference to Exhibit 10.14 to the Holdings Registration Statement).*
 
 10.8    -- Letter Agreement, dated July 15, 1998, between ISP and Dr. Peter Heinze (incorporated by reference to
            Exhibit 4.3 to ISP's Registration Statement on Form S-8 (Registration No. 333-62359)).*
 
 10.9    -- Stock Appreciation Rights Agreement, dated January 20, 1994, between GAF Corporation and James P.
            Rogers (incorporated by reference to Exhibit 10.20 to G-I Holdings Annual Report on Form 10-K for the
            year ended December 31, 1993).*
 
 10.10   -- Compensation and Indemnification Agreement among Charles M. Diker, Burt Manning and ISP, dated
            October 10, 1997 (incorporated by reference to Exhibit 10.23 to the ISP Registration Statement).*
 
 10.11   -- Agreement and Plan of Merger between ISP Holdings and International Specialty Products Inc., dated as
            of March 30, 1998 (incorporated by reference to Exhibit A to Amendment No. 2 to ISP Holdings Schedule
            13D with respect to the common stock of International Specialty Products Inc. filed with the
            Securities and Exchange Commission on April 1, 1998).
 
 21      -- Subsidiaries of ISP.
 
 23      -- Consent of Arthur Andersen LLP.
 
 27      -- Financial Data Schedule for fiscal year 1998, which is submitted electronically to the Securities and
            Exchange Commission for information only.
</TABLE>
------------------
 * Management and/or compensation plan or arrangement.