UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

---

FORM 10-K

|(Mark One)                                                    |                                                                                         
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                             | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended December 31, 2003                  
|or                                                           
|o                                                             | 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 333-82822

---

INTERNATIONAL SPECIALTY HOLDINGS INC.(Exact name of registrant as specified in its charter)

|Delaware(State of Incorporation)                                                           |  | 22-3807354(I.R.S. Employer Identification No.)
|------------------------------------------------------------------------------------------ |  | ----------------------------------------------
|300 Delaware Avenue Suite 303
Wilmington, Delaware(Address of Principal Executive Offices) |  | 19801(Zip Code)                               
|Registrant's telephone number, including area code: (302) 427-5715                        
|Securities registered pursuant to Section 12(b) of the Act: None                          
|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 ý    No o

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. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Act). Yes o    No ý

As of March 23, 2004, 100 shares of common stock, par value $.001 per share of the registrant were outstanding. There is no trading market for the common
stock of the registrant. As of March 23, 2004, no shares of the registrant were held by non-affiliates.



---



INTERNATIONAL SPECIALTY HOLDINGS INC.
Form 10-K
for the fiscal year ended December 31, 2003

Table of Contents

|PART I   |  |                                                                                                |  |   
|-------- |  | ---------------------------------------------------------------------------------------------- |  | --
|Item 1.  |  | Business                                                                                       |  | 3 
|Item 2.  |  | Properties                                                                                     |  | 13
|Item 3.  |  | Legal Proceedings                                                                              |  | 15
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                            |  | 16
|PART II  |  |                                                                                                |  |   
|Item 5.  |  | Market for Registrant's Common Equity and Related Stockholder Matters                          |  | 17
|Item 6.  |  | Selected Financial Data                                                                        |  | 17
|Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations          |  | 17
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  | 17
|Item 8.  |  | Financial Statements and Supplementary Data                                                    |  | 17
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 17
|Item 9A. |  | Controls and Procedures                                                                        |  | 17
|PART III |  |                                                                                                |  |   
|Item 10. |  | Directors and Executive Officers of the Registrant                                             |  | 18
|Item 11. |  | Executive Compensation                                                                         |  | 20
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 24
|Item 13. |  | Certain Relationships and Related Transactions                                                 |  | 24
|Item 14. |  | Principal Accountant Fees and Services                                                         |  | 27
|PART IV  |  |                                                                                                |  |   
|Item 15. |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                               |  | 28

2

---



PART I

The Business section and other parts of this annual report on Form 10-K contain both historical and forward-looking
statements that involve risks and uncertainties. Many of the forward-looking statements are located in "Management's Discussion and Analysis of Financial Condition and Results of Operations." These
forward-looking statements are only predictions and generally can be identified by words such as "anticipates," "expects," "believes," "intends," "plans," "predicts," "foresees" and other related
terms. Similarly, statements that describe our objectives, plans or goals are also forward-looking statements. Our 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. Forward-looking statements are not guarantees of future performance and our actual results may differ
significantly from the results discussed in the forward-looking statements. The forward-looking statements included herein are made only as of the date of this annual report on
Form 10-K. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.

Item 1.    Business

General

International Specialty Holdings Inc. is a leading multinational manufacturer and supplier of specialty and industrial chemicals and mineral products for a
wide variety of personal care, pharmaceutical, food, beverage and industrial applications. We produce more than 400 specialty chemicals which we market and sell worldwide. We are a wholly owned
subsidiary of International Specialty Products Inc., or ISP, and were incorporated in June 2001 in connection with an internal corporate restructuring by ISP. The business of our parent,
ISP, primarily consists of owning all of our issued and outstanding capital stock. We own all of the issued and outstanding capital stock of ISP Chemco Inc. and ISP Investco LLC. ISP Chemco
operates ISP's businesses exclusively through its direct and indirect subsidiaries. ISP Investco was formed in 2001 for the purpose of holding all of ISP's investment assets and related liabilities.
As a result of a proposal by Samuel J. Heyman, our and ISP's Chairman, to acquire beneficial ownership of all shares of ISP common stock that he did not already beneficially own, which was completed
in February 2003, which we refer to as ISP's going private transaction, ISP's common stock is no longer publicly traded and Mr. Heyman is now the beneficial owner (as defined in
Rule 13d-3
under the Exchange Act) of 100% of ISP's common stock and our common stock. Following the completion of ISP's going private transaction, ISP's common stock was delisted from the New York Stock
Exchange and its registration with the Securities and Exchange Commission was terminated. Unless otherwise indicated by the context, "we," "us," "our," and "IS Holdings" refers to International
Specialty Holdings Inc. and its consolidated subsidiaries and "ISP" refers to International Specialty Products Inc. and its consolidated subsidiaries.

The
address and telephone number of our principal executive offices is 300 Delaware Avenue, Suite 303, Wilmington, Delaware 19801, (302) 427-5715.

Effective
January 1, 2003, we changed the composition of our reportable business segments to be consistent with the current structure of our businesses. Over the last five years,
we have moved toward increasing our focus on our consumer-oriented and service intensive businesses while consolidating and downsizing our low margin butanediol business and controlling costs.
Consistent with that business focus, we now report three business segments: specialty chemicals, industrial chemicals and mineral products. Our specialty chemicals business segment consists of the
personal care; pharmaceutical, food and beverage; performance chemicals; and fine chemicals product lines.

We
have and continue to increase our consumer-oriented focus through new, more profitable product offerings, enhanced technical capabilities and penetration into new markets. We also
have supplemented our internal resources with strategic alliances and complementary acquisitions. We continue to lower our costs through operating efficiencies and plant consolidations.

3

---

Product
offerings include a hair care product that provides faster drying time and greater hold for styling flexibility and a solvent that improves the stability and absorption of
pharmaceutical products. We have also introduced a patented, water-based micro-emulsion that more effectively disperses the active agricultural ingredient for easier application and improved
environmental safety in crop spraying.

To
enhance support provided by our technical service team, we have added technical service laboratories to our current global network of applications. In this regard we opened a new
technical service laboratory in Mexico.

Strategic
alliances have allowed us to leverage our core strengths in marketing, sales and technical services to obtain access to new technologies and expand the breadth and utility of
our product offerings. These product offerings as a result of these strategic alliances include skin conditioners and other skin care products, pharmaceutical over-the counter, nutritional
and oral care applications, personal care products, and a line of polymers.

We
continually explore possible acquisitions where we seek to acquire complementary technologies or products, expand our customer base and leverage our sales and distribution
infrastructure and existing client relationships. For example, we acquired our alginates business and now provide naturally derived food thickeners and stabilizers to a variety of markets that
complement our existing products and technology, such as the pharmaceutical ingredients, food and beverage markets. We also acquired our industrial biocides business that includes a product line of
fungicides, preservatives, algaecides and biocides to expand our performance chemicals product line.

In
May 2003, we acquired Germinal S.A., a company that supplies the meat and dairy industry in Southern Latin America with ingredient systems. The acquisition adds to the
expansion of our high-value specialty products in our food ingredients business.

We
expanded our Freetown, Massachusetts manufacturing facility's production capabilities to allow for the manufacture of some specialty chemical products for our personal care product
line and to offer custom manufacturing capability to the pharmaceutical, biotechnology, agricultural and chemical process industries. In connection with the relocation of some of our production lines
for our personal care product line to our Freetown facility, we shut down our manufacturing operation at our Belleville, New Jersey plant in 2001.

During
the last five years, we have invested approximately $300 million in maintaining and upgrading our manufacturing plants including equipment modifications and
de-bottlenecking solutions which have significantly increased our manufacturing efficiency and capacity. We have also streamlined and consolidated our operations to increase efficiency and
reduce our operating costs. For example, we shut down our high cost butanediol production at our Calvert City, Kentucky plant in 1999, at our Seadrift, Texas plant in 2000 and at our Texas City, Texas
plant in 2001. In addition, we shifted butanediol production following these shutdowns to our lower cost Marl, Germany facility.

Business Segments

Specialty Chemicals



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.

4

---

Our
specialty chemicals segment is organized based upon the markets for our products. Accordingly, we manage our specialty chemicals segment through the following product lines:



In
each of the years ending December 31, 2001, 2002 and 2003, sales of our specialty chemicals represented approximately 70%, 71% and 70%, of our revenues respectively. For
information about the amount of sales by each of our specialty chemical product lines, see "Management's Discussion and Analysis of Financial Condition and Results of OperationsResults of
Operations" and
Note 19 to our consolidated financial statements included in this annual report on Form 10-K. Most of our specialty chemical products fall within the following categories:



The
balance of our specialty chemical products are marketed by our performance chemicals, and fine chemicals product lines. In addition, our sunscreens, preservatives and emollients, are
each marketed by our personal care product line.

Personal Care.Our personal care product line markets numerous specialty chemicals that serve as critical ingredients in the
formulation of many well-known skin care, hair care, toiletry and cosmetic products. For example, our polyvinylpyrrolidone polymers, which are derived from acetylene, are critical
components in hair styling gels. If this polymer were removed, hold, stiffness and styling would be lost.

Our
skin care ingredients include:



5

---



Our
Escalol® 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® 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® Plus, a patented product that offers broad-spectrum anti-microbial activity, and Suttocide®
A, a preservative gentle enough for infant care products.

Our
Bio-Functional Ingredients platform offers unique, clinically-proven and consumer-perceivable benefits that contribute to healthier skin. Vital ET is a
Vitamin E phosphate complex that that has outstanding efficacy as an anti-inflammatory and anti-erythemal agent that offers particular benefits in our sun care formulations.

Our
hair care ingredients, marketed under the Gantrez®, Gafquat®, 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 developed the world's first high-performance hair protectant, Escalol®
HP-610, to prevent sun damage to hair. We also developed a polymer, Aquaflex® FX-64, for use in styling products and low VOC hair sprays, which provides a soft
feeling with a long lasting hold for both aerosol and pump spray applications.

Pharmaceutical, Food and Beverage.Our specialty chemicals for the pharmaceutical, food and beverage market provide a number
of end-use products with their unique properties while enabling these products to meet increasingly strict regulatory requirements.

In
the pharmaceutical market, our specialty chemicals serve as key ingredients in the following types of products:



Our
Plasdone® and Polyplasdone® polymers for tablet binders and tablet disintegrants are established excipients for use in the production of wet granulated
tablets. Our Gantrez® bioadhesive polymers serve as critical ingredients in denture adhesives and tartar control toothpastes. In denture adhesives, Gantrez® provides the
strength and
duration of the hold of the denture to the gums. In tartar control toothpastes, Gantrez® inhibits enzyme activity in the mouth to increase the effectiveness of the product's tartar
control.

In
the food and beverage markets, our alginates and acetylene-derived polymers serve as critical ingredients in the manufacture of numerous consumer products, including salad dressings,
cheese sauces, fruit fillings, beer and health drinks. For example, our alginates products, marketed under the Kelcoloid® tradename, are used as stabilizers in many well-known
consumer products and prevent the separation of oil emulsions. Our acetylene-based specialty polymers, marketed under the Polyclar® tradename, serve the beverage market by assuring the
clarity and extending the shelf life of beer, wine and fruit juices.

6

---

Performance Chemicals.Our performance chemicals product line includes acetylene-based polymers, vinyl ether monomers and
advanced materials for consumer, agricultural and industrial applications. Our acetylene-based chemistry produces a number of performance chemicals for use in a wide range of markets including:



ViviPrint
is our line of polymers developed for specialty coating applications in ink jet printing. These products provide significant moisture and abrasion resistance, high
gloss and excellent resolution for high-quality printers and photo reproductions.

Our
performance chemical product line also includes our biocides business which is comprised of a broad range of preservatives and fungicides for various product applications, including
paint and coatings.

Our
advanced materials include the Ferronyl® brand of dietary iron supplement, which is marketed to the pharmaceutical industry and also includes high-purity
carbonyl iron powders, sold under the Micropowder® name, for use in the aerospace, defense, electronics and powder metallurgy industries.

Fine Chemicals.Our fine chemicals product line 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 market our specialty chemicals using a worldwide marketing and sales force, typically chemists or chemical engineers, who work closely with our customers to
familiarize them with our customers' products, manufacturing processes and markets. We primarily sell our specialty chemicals directly to our customers through our global distribution network. We sell
a limited portion of our specialty chemicals through distributors. We conduct our domestic marketing and sales efforts from our headquarters in Wayne, New Jersey and regional offices strategically
located throughout the United States.



We conduct our international operations through 46 subsidiaries and 50 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 2001, 2002 and 2003 were approximately 48%, 47% and 52% of our total sales of the specialty chemicals segment for those periods,
respectively. For more information about our international sales, see Note 20 to our consolidated financial statements included in this annual report on Form 10-K.
International sales are subject to exchange rate fluctuation risks. For a discussion of our policy regarding the management of these risks, see "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.

7

---

We
operate an alginates manufacturing plant in Girvan, Scotland and a research and administrative center in Tadworth, England. In addition, we hold equity investments in three seaweed
processing joint ventures located in Ireland, Iceland and Tasmania. These joint ventures serve to provide our alginates business with a steady supply of its primary raw material, seaweed.

For
information about the locations of our international long-lived assets, see Note 20 to our consolidated financial statements included in this annual report on
Form 10-K.

Industrial Chemicals



We manufacture a broad spectrum of industrial chemicals having numerous applications in 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 products specifically developed to meet customer requirements.

In
each of the years ending December 31, 2001, 2002 and 2003, sales of industrial chemicals represented approximately 20%, 18% and 19% of our revenues respectively. For more
information about industrial chemicals sales, see "Management's Discussion and Analysis of Financial Condition and Results of
OperationsResults of Operations" and Note 19 to our consolidated financial statements included in this annual report on Form 10-K. Most of our industrial
chemical products fall within the following categories and are all marketed by our industrial chemicals segment:



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:



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.



We market our industrial chemicals using a worldwide marketing and sales force, typically chemists or chemical engineers, who work closely with our customers to
familiarize them with our customers' products, manufacturing processes and markets. We primarily sell our industrial chemicals directly to our customers through our global distribution network. We
sell a limited portion of our industrial chemicals through distributors. We conduct our domestic marketing and sales efforts from our

8

---

headquarters
in Wayne, New Jersey and regional offices strategically located throughout the United States.



We conduct our international operations through 46 subsidiaries and 50 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 industrial chemicals in 2001, 2002 and 2003 were approximately 81%, 83% and 83% of our total sales of the industrial chemicals segment for those periods,
respectively. For more information about our international sales, see Note 20 to our consolidated financial statements included in this annual report on Form 10-K.
International sales are subject to exchange rate fluctuation risks. For a discussion of our policy regarding the management of these risks, see "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 ISP Marl GmbH, primarily a butanediol manufacturing facility, and ISP Acetylene GmbH, an acetylene production plant. We lease the property where this manufacturing
facility and plant are located pursuant to a long-term ground lease. Both production facilities are located at Degussa's Chemiepark site in Marl, Germany, and each relies upon Degussa to
provide specific services, including utilities, rail transport and waste handling. We believe that the production costs for butanediol and THF at ISP Marl are among the most competitive in the
industry. ISP Acetylene operates a fully dedicated modern production facility that provides ISP Marl with its primary raw material, acetylene. ISP Acetylene, which employs electric arc technology for
the production of
acetylene from various hydrocarbon feedstocks, utilizes state-of-the-art gas separation technology. ISP Acetylene's entire production is dedicated to fulfilling ISP
Marl's requirements and has no third-party sales.

For
information about the locations of our international long-lived assets, see Note 20 to our consolidated financial statements included in this annual report on
Form 10-K.

Mineral Products



We manufacture mineral products consisting of semi-ceramic-coated colored roofing granules, algae resistant granules and headlap granules, which are
produced from rock deposits that are mined and crushed at our quarries. We utilize a proprietary process to produce our colored and algae resistant roofing granules. We sell our mineral roofing
granules primarily to the United States 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 believe that we are the second largest of only three major suppliers of colored roofing granules in the United States in terms of production capacity and sales
revenue. For information about the amount of sales of our mineral products, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 19 to our
consolidated financial statements included in this annual report on Form 10-K.

We
believe that approximately 80% of the asphalt shingles currently produced by the roofing industry are sold for the re-roofing/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 believe

9

---

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.

Sales
to Building Materials Corporation of America, or BMCA, our affiliate, and its subsidiaries constituted approximately 75% of our mineral products net sales in 2003.

See
"Certain Relationships" and Note 13 to our consolidated financial statements included in this annual report on Form 10-K. See also "Management's Discussion
and Analysis of Financial Condition and Results of Operations2003 compared with 2002."



We market our mineral products on a national basis to residential and commercial roofing manufacturers utilizing a direct sales team with expertise in product
application and logistics. We ship finished products using rail and trucks from four manufacturing facilities strategically located throughout the United States. From our offices located in
Hagerstown, Maryland, we provide logistical support and operate a customer design center to engineer product applications according to our customers' requirements. Our technical services and
manufacturing teams provide support and consultation services upon specific requirements by our customers.

Raw Materials

Because of the multi-step processes required to manufacture our specialty and industrial 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 acetylene-based specialty chemicals are acetylene, formaldehyde 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 unaffiliated suppliers pursuant to supply contracts. We have a contract with a multinational supplier to supply a substantial amount of our acetylene requirements to our Texas
City, Texas facility that expires at the end of March 2004. As a result of this contract expiration we have reduced our acetylene requirements at our Texas City facility by 50% through shifting
production of acetylene-consuming products to our Calvert City, Kentucky manufacturing facility. We have also entered into a long-term supply agreement for the remaining Texas City
facility requirements with a local acetylene producer. Under this agreement, we are obligated to purchase specified quantities of acetylene through the end of 2013. Pricing under the contract is on a
fixed basis with escalators related to changes in the Producer Price Index.

We
also have an acetylene supply contract for our requirements of acetylene delivery via pipeline to our Calvert City, Kentucky manufacturing facility. The current term of this contract
expires December 31, 2009 and allows us, at our sole option, to extend the agreement for two additional terms of five years each. Pricing under the contract is on a fixed basis with escalators
related to changes in the Producer Price Index.

We
believe that the diversity of our acetylene supply sources and our use of a number of acetylene production technologies provide us with a reliable supply of acetylene. In the event of
a substantial

10

---

interruption
in the supply of acetylene from current sources, 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.

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. The Marl facility obtains the majority of its critical supplies and services from Degussa including electricity and butane via a long term supplies and services agreement.

In
the event of a substantial interruption in the supply of electricity and hydrocarbon feedstocks to ISP Marl, 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.

We
use natural gas and raw materials derived from petroleum in many of our manufacturing processes. We experienced no significant problems in the purchase of these raw materials during
2003, although we experienced upward pressure on certain raw material pricing. Availability of other raw materials, including methanol and methylamine, remained adequate during 2003. Although it is
impossible to predict future shortages of raw materials or the impact any such shortages would have, we believe that in the event of a supply interruption we could obtain adequate supplies of raw
materials from alternate sources.

The
principal raw material used in the manufacture of alginates consists of select species of seaweed. We process seaweed in both wet and dry forms. We use our own specially designed
vessels to harvest, under government license, wet seaweed from leased kelp beds in the Pacific Ocean to supply our San Diego, California facility. Our Girvan, Scotland facility processes primarily dry
seaweed purchased from our joint ventures in Iceland, Ireland and Tasmania, as well as from independent suppliers in South America. We believe that the species of seaweed required to manufacture
alginates will remain readily available and that we will have adequate access to this seaweed to provide us with adequate supplies of this raw material for the foreseeable future.

Our
mineral products business owns three quarries and leases one quarry with 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. These quarries each have proven reserves, based on current production levels, of
more than 20 years. We have a royalty arrangement based on the amount of rock deposits extracted annually from our Ione, California quarry.

Competition

We believe that we are the second largest seller, based on revenues, worldwide of specialty chemicals derived from acetylene, other than butanediol and
tetrahydrofuran, and we believe that we are the second largest seller, based on revenues, worldwide of alginates.

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 alginates, sunscreens, emollients, moisturizers and fine chemicals, a number of world-wide competitors can provide similar products or services.

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. BASF Corporation and Lyondell Corporation supply the merchant market from their plants in
the United States and in Europe. British Petroleum currently supplies the merchant market from their single manufacturing plant in the United States. Tetrahydrofuran and N-methyl
pyrrolidone are manufactured by a number of companies throughout the world.

11

---



With regard to our mineral products, our primary competitors are the 3M Company and Reed Minerals. We believe that competition has been limited by the substantial capital expenditures
associated with the construction of new mineral processing and coloring plants and the acquisition of suitable rock reserves; the limited availability of proven rock sources; 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; 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 the difficulty in obtaining the necessary permits
to mine and operate a quarry.

Competition
in the markets for our specialty chemicals, industrial chemicals and mineral products 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.

Financial
information concerning our industry segments and foreign and domestic operations required by Item 1 is included in Notes 19 and 20 to our consolidated financial
statements included in this annual report on Form 10-K.

Research and Development

Our worldwide research and development expenditures were $25.4, $26.0 and $25.3 million in 2001, 2002 and 2003, 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; Freetown, Massachusetts; Columbus, Ohio; San Diego, California; and Girvan, Scotland, as well as at technical centers
in the United Kingdom, Canada, Brazil, Germany, China, Singapore and Mexico. Our mineral products research and development facility, together with our customer design and color center, is located in
Hagerstown, Maryland.

Environmental Services

We received approval from the New Jersey Turnpike Authority for a direct access ramp extension from the New Jersey Turnpike to our Linden, New Jersey property.
With the planned New Jersey Turnpike access, it is likely that development alternatives such as warehousing will provide greater economic benefits than our previously considered development
alternative of construction of a hazardous waste treatment, storage and disposal facility at this site. See Item 3, "Legal ProceedingsEnvironmental Claims and Proceedings."

Patents and Trademarks

As of December 31, 2003, we owned or licensed approximately 425 domestic and 605 foreign patents or patent applications and owned or licensed approximately
150 domestic and 1,525 foreign trademark registrations or applications related to our business. While we believe the patent protection covering some 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
with 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

12

---

the
operations of our predecessor and certain of the substances that are or have been used, produced or discharged at our or our predecessor's plants or at other locations, we are affected by these
environmental laws and regulations. We have made capital expenditures of approximately $6.3 million in 2001, $3.6 million in 2002 and $7.0 million in 2003, 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
2004 and 2005 will be approximately $6.5 and $7.5 million, respectively.

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 by governmental authorities 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.

Employees

At December 31, 2003, we employed approximately 2,800 people worldwide. Approximately 758 employees in the United States were subject to seven union
contracts. We believe that our relations with our employees and their unions are satisfactory.

ISP Investco

We conduct our investments business through ISP Investco and its subsidiaries. We invest primarily in international and domestic securities of companies involved
in acquisition or reorganization transactions. Those investments include common stock short positions that are offset against long positions in securities that are expected, under certain
circumstances, to be exchanged or converted into the short positions. From time to time we also invest in securities of companies that we consider to be undervalued.

Other Information

We have not established and do not maintain an internet website. However, we do make our annual report on Form 10-K and current quarterly
reports on Form 10-Q that are filed with the Securities and Exchange Commission (the "SEC") available electronically via ISP's internet website at www.ispcorp.com. Any materials that we have filed
with the SEC may be read and copied by the public at the SEC's Public Reference Room located at 450
Fifth Street, N.W., Washington, DC 20549 or by telephoning the SEC at 1-800-SEC-0330. These reports are also available electronically on the SEC's EDGAR website at www.sec.gov. Alternatively, if you
wish to receive a paper copy of our reports or any of the exhibits filed with or furnished to the Securities and
Exchange Commission, they may be obtained by writing to: the Corporate Secretary, International Specialty Holdings Inc., c/o ISP Management Company, Inc., 1361 Alps Road, Wayne, New
Jersey 07470.

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
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

13

---

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.

|Location                        |         | Facility                                                                    |                                                                 | Product Line       
|------------------------------- | ------- | --------------------------------------------------------------------------- | --------------------------------------------------------------- | -------------------
|                                |         | Domestic                                                                    |                                                                 |                    
|Alabama, Huntsville             |         | Plant*                                                                      |                                                                 | Specialty Chemicals
|California, Ione                |         | Plant, Quarry*                                                              |                                                                 | Mineral Products   
|California, San Diego           |         | Plant*                                                                      |                                                                 | Specialty Chemicals
|Kentucky, Calvert City          |         | Plant                                                                       |                                                                 | Specialty Chemicals
|Maryland, Hagerstown            |         | Research Center, Design Center, Sales Office                                |                                                                 | Mineral Products   
|Massachusetts, Freetown         |         | Plant, Research Center                                                      |                                                                 | Specialty Chemicals
|Missouri, Annapolis             |         | Plant, Quarry                                                               |                                                                 | Mineral Products   
|New Jersey                      |         |                                                                             |                                                                 |                    
|                                | Chatham |                                                                             | Plant, Research Center                                          |                    
|                                | Wayne   |                                                                             | Headquarters, Corporate Administrative Offices, Research Center |                    
|New York, New York City         |         | Corporate Administrative Offices                                            |                                                                 | N/A                
|Ohio, Columbus                  |         | Plant, Research Center, Sales Office                                        |                                                                 | Specialty Chemicals
|Pennsylvania, Blue Ridge Summit |         | Plant, Quarry                                                               |                                                                 | Mineral Products   
|Texas, Texas City               |         | Plant                                                                       |                                                                 | Specialty Chemicals
|Wisconsin, Pembine              |         | Plant, Quarry                                                               |                                                                 | Mineral Products   
|                                |         | International                                                               |                                                                 |                    
|Belgium, Sint-Niklaas           |         | Sales Office, Distribution Center                                           |                                                                 | Specialty Chemicals
|Brazil, Cabreuva                |         | Plant, Research Center, Sales Office                                        |                                                                 | Specialty Chemicals
|Brazil, Sao Paulo               |         | Sales Office*, Distribution Center*                                         |                                                                 | Specialty Chemicals
|Canada, Leaside, Ontario        |         | Plant, Research Center, Sales Office, Warehouse                             |                                                                 | Specialty Chemicals
|Canada, Mississauga, Ontario    |         | Sales Office*, Distribution Center*                                         |                                                                 | Specialty Chemicals
|England, Tadworth               |         | Research Center*, Sales Office*                                             |                                                                 | Specialty Chemicals
|Germany                         |         |                                                                             |                                                                 |                    
|                                | Cologne |                                                                             | European Headquarters*, Research Center*, Sales Office*         |                    
|                                | Marl    |                                                                             | Plants**, Sales Office**                                        |                    
|India, Nagpur                   |         | Plant**                                                                     |                                                                 | Specialty Chemicals
|Japan, Tokyo                    |         | Sales Office*                                                               |                                                                 | Specialty Chemicals
|Scotland, Girvan                |         | Plant                                                                       |                                                                 | Specialty Chemicals
|Mexico, Mexico City             |         | Research Center*, Sales Office*                                             |                                                                 | Specialty Chemicals
|Singapore                       |         | Sales Office*, Distribution Center*, Asia-Pacific Headquarters*, Warehouse* |                                                                 | Specialty Chemicals

---

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 2003, we made capital expenditures in the amount of $62.8 million relating to plant, property and equipment.

14

---

Item 3.    Legal Proceedings



We, together with other companies, are a party to a variety of proceedings and lawsuits involving environmental matters under the Comprehensive Environmental
Response Compensation and Liability Act, Resource Conservation and Recovery Act and similar state laws, in which recovery is sought for the cost of cleanup of contaminated sites or remedial
obligations are imposed, a number of which are in the early stages or have been dormant for protracted periods. We refer to these claims in this report as "Environmental Claims."

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, 2003, is approximately $20.8 million, before reduction for insurance recoveries included in our balance sheet of $28.1 million that relate
to both past expenses and estimated future liabilities, which we refer to as "estimated recoveries." While we cannot predict whether adverse decisions or events can occur in the future, 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 or decrease our estimate of insurance recoveries in respect of those 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, we believe that it is probable that we will receive the estimated recoveries discussed above. 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 these claims. In addition, the recoveries could be in excess of the current estimated liability for all Environmental Claims, although there can be no assurance in this regard.

In
June 1997, G-I Holdings Inc. commenced litigation on behalf of itself and its predecessors, successors, subsidiaries and related corporate entities,
including ISP, in the Superior Court of New Jersey-Somerset County, seeking amounts substantially in excess of the estimated recoveries. This action was removed in February 2001 to the United
States Bankruptcy Court for the District of New Jersey in connection with the filing of G-I Holdings' Chapter 11 petition. In November 2002, all parties consented to have the action
remanded to the Superior Court of New Jersey-Somerset County, where it remains pending. While ISP believes that the claims are
meritorious, it cannot be certain that it will prevail in its efforts to obtain amounts equal to, or in excess of, the estimated recoveries. Unless otherwise indicated by the context, "G-I
Holdings" refers to G-I Holdings Inc. and any and all of its predecessors, including GAF Corporation and GAF Fiberglass Corporation.

In
June 1989, we entered into a Consent Order with the New Jersey Department of Environmental Protection 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
for which an estimate cannot currently be made. In April 1993, the New Jersey Department of Environmental Protection 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 New Jersey Department of Environmental Protection order at a cost of approximately $13.2 million. See Item 1, "BusinessEnvironmental Services."

15

---



In connection with ISP's going private transaction that was completed on February 28, 2003, six purported class action lawsuits were filed on behalf of ISP
stockholders in July 2002 in the Court of Chancery of the State of Delaware against ISP and members of its board of directors, which were consolidated. We refer to these lawsuits as the
Delaware action. Also in July 2002, a seventh purported class action lawsuit was filed on behalf of ISP stockholders in the United States District Court for the District of New Jersey against
ISP and members of its board of directors, which we refer to as the New Jersey action. The plaintiffs in the Delaware action and the New Jersey action variously sought a court order enjoining the
going private transaction, an award of unspecified damages and attorneys' fees, the unwinding of any transaction and other unspecified equitable relief.

The
parties to the Delaware action reached a settlement of that litigation and following a hearing on August 14, 2003, the settlement was approved by the Court of Chancery, which
approval became a final order. As a result of the settlement, all claims were dismissed without any admission of fault by the defendants and all defendants were released from any and all claims made
or that could have been made by the plaintiffs and all members of a purported plaintiff class consisting of all record and beneficial holders of ISP common stock related to the going private
transaction (including the claims made in the New Jersey action). In September 2003, the New Jersey action was dismissed with prejudice based upon the final order of the Court of Chancery in
the Delaware action.

See
Notes 8 and 21 to our consolidated financial statements included in this annual report on Form 10-K for additional information about legal proceedings.

Item 4.    Submission of Matters to a Vote of Security Holders

None.

16

---



PART II

Item 5.    Market for Registrant's Common Equity and Related Stockholder Matters

All of our common stock is owned by ISP. Accordingly, there is no public trading market for our common stock.

In
2002 and 2003, we declared and paid dividends of $17.3 and $0 million, respectively, to ISP. See Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 14 to our consolidated financial statements included in this annual report on Form 10-K for information regarding restrictions on the payment
of dividends and contributions set forth on pages F-2 to F-24 and page F-54, respectively. Any decision to pay dividends or make capital contributions, and the
timing and amount thereof, is dependent upon, among other things, our results of operations, financial condition, cash requirements, prospects and other factors deemed relevant by our Board of
Directors.

Item 6.    Selected Financial Data

See page F-25.

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-21.

Item 8.    Financial Statements and Supplementary Data

See Index on page F-1 and Financial Statements and Supplementary Data on pages F-28 to F-77.

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There were no disagreements with accountants on accounting or financial disclosures during the last two fiscal years. On June 20, 2002, we replaced Arthur
Andersen LLP as our independent public accountants and engaged KPMG LLP to serve as our independent public accountants. For more information with respect to this matter, see our current report on
Form 8-K filed on June 24, 2002.

Item 9A.    Controls and Procedures

Disclosure Controls and Procedures:Our management, with the participation of the Chief Executive Officer and Chief Financial
Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer
have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to
be disclosed by us in the reports filed, furnished or submitted under the Exchange Act.

Internal Control Over Financial Reporting:There were no significant changes in our internal control over financial reporting
identified in management's evaluation during the fourth quarter of fiscal year 2003 that have materially affected or are reasonably likely to materially affect our internal control over financial
reporting.

17

---

PART III

Item 10.    Directors and Executive Officers of the Registrant

Executive Officers of the Registrant

The following are the name, age and respective positions of our directors and executive officers.

|Name                |  | Age |  | Position                                                         
|------------------- |  | --- |  | -----------------------------------------------------------------
|Samuel J. Heyman    |  | 65  |  | Chairman of the Board and Director                               
|Sunil Kumar         |  | 54  |  | Chief Executive Officer, President and Director                  
|Richard A. Weinberg |  | 44  |  | Executive Vice President, General Counsel, Secretary and Director
|Susan B. Yoss       |  | 45  |  | Executive Vice PresidentFinance and Treasurer                   
|Roger J. Cope       |  | 59  |  | Senior Vice President, Sales and MarketingNorth America         
|Neal E. Murphy      |  | 46  |  | Senior Vice President and Chief Financial Officer                

Set
forth below is a description of the backgrounds, including business experience over the past five years, for each of our directors and executive officers. There are no family
relationships that exist between any of our directors or executive officers. Under our bylaws, our officers are elected by the Board of Directors and hold office until their respective successors are
duly elected and qualified.

Samuel J. HeymanMr. Heyman has been a director and Chairman of the Board of IS Holdings since December 2001 and
of ISP since its formation and was Chief Executive Officer of ISP and some of its subsidiaries from their formation to June 1999. Mr. Heyman also has been a director of G-I
Holdings for more than five years and was President and Chief Executive Officer of G-I Holdings and some of its subsidiaries for more than five years until September 2000. In
January 2001, G-I Holdings filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code due to its asbestos-related claims. Mr. Heyman was a
director and Chairman of the Board of BMCA from its formation to September 2000 and served as Chief Executive Officer of BMCA and some of its subsidiaries from June 1999 to
September 2000. 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.

Sunil KumarMr. Kumar has been President and Chief Executive Officer of IS Holdings since June 2001, and of ISP
Chemco and ISP since June 1999. He has been a director of IS Holdings and ISP Chemco since June 2001, and a director of ISP since June 1999. Mr. Kumar was a director,
President and Chief Executive Officer of BMCA and some of its subsidiaries from May 1995, July 1996 and January 1999, respectively, to June 1999. He also was a director and
Vice-Chairman of the Board of G-I Holdings from January 1999 to June 1999. In January 2001, G-I Holdings filed a voluntary petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code due to its asbestos-related claims.

Richard A. WeinbergMr. Weinberg has been Executive Vice President, General Counsel and Secretary of IS Holdings since
June 2001 and a director since December 2001. He has also been Executive Vice President, General Counsel and Secretary of ISP for more than five years and has been a director since
December 2003. He has been Executive Vice President and Secretary of ISP Chemco and its subsidiaries since May 2003 and a director since August 2002 and June 1998 to
June 2001, respectively. He was previously Executive Vice President, General Counsel and Secretary of ISP

18

---

Chemco
and its subsidiaries for more than five years to May 2003. He has also been a director of ISP Chemco's subsidiaries for more than five years. Mr. Weinberg has been President,
Chief Executive Officer, General Counsel and Secretary of G-I Holdings since September 2000 and was Executive Vice President, General Counsel and Secretary of G-I
Holdings from May 1998 to September 2000. Mr. Weinberg has served as a director of G-I Holdings for more than five years. In January 2001, G-I
Holdings filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code due to its asbestos-related claims. Mr. Weinberg also has been Executive Vice President,
General Counsel and Secretary of BMCA and its subsidiaries for more than five years.

Susan B. YossMs. Yoss has been Executive Vice PresidentFinance and Treasurer of IS Holdings since
June 2001 and ISP since September 2000. She has also been Executive Vice President-Finance of ISP Chemco since May 2003. She was previously Executive Vice President-
Finance and Treasurer of ISP Chemco and its subsidiaries from September 2000 to April 2003. She was also Senior Vice President and Treasurer of ISP and its subsidiaries from
July 1999 to September 2000 and was Vice President and Treasurer of ISP and its subsidiaries from February 1998 to June 1999. She also has been Senior Vice President of
BMCA and its subsidiaries since July 1999 and was Treasurer of those same companies from July 1999 to August 2001. She was Vice President and Treasurer of BMCA from
February 1998 to June 1999. Ms. Yoss also has served as Senior Vice President, Chief Financial Officer and Treasurer of G-I Holdings since July 1999. In
January 2001, G-I Holdings filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code due to its asbestos-related claims.

Roger J. CopeMr. Cope has been Senior Vice President-Sales and Marketing for North America of IS Holdings, ISP Chemco
and ISP since January 2004, respectively. He was Senior Vice President Sales and Commercial DirectorEurope of IS Holdings, ISP Chemco and ISP and most of its subsidiaries from
July 1999 until December 2003 and was previously a director of ISP Chemco from June 2001 until August 2002. He was Senior Vice President, Pharmaceutical, Agricultural and
Beverage Group of ISP and some of its subsidiaries from July 1998 to July 1999.

Neal E. MurphyMr. Murphy has been Senior Vice President and Chief Financial Officer of IS Holdings, ISP and ISP Chemco
and its subsidiaries since February 2002. He has been a director of ISP Chemco since February 2002. Prior to joining ISP, he was President of PQ Europe, a global developer and producer
of silica-based specialty chemicals, inorganic chemicals and performance particles from August 1999 to September 2001 and Vice President and Chief Financial Officer of PQ Corporation,
the parent of PQ Europe, from May 1995 until July 1999.

Audit Committee Financial Expert

We are not "issuers" of securities as that term is defined in the Securities Exchange Act of 1934 and do not have any securities listed on a national exchange.
Based on the foregoing, our Board of Directors does not, nor is it required to have an audit committee and therefore is not required to determine anyone to be an audit committee financial expert.

Code of Ethics

All of our employees, including our principal executive officer, principal financial officer, principal accounting officer and the persons performing similar
functions, are required to abide by our code of ethics and business conduct policies to ensure that our business is conducted in a consistently legal and ethical manner. We intend to disclose any
changes in or waivers from our code of ethics by filing a current report on Form 8-K with the Securities and Exchange Commission. We will provide to any person, without charge, upon
request, a copy of our code of ethics by writing to: the Corporate Secretary, International Specialty Holdings Inc., c/o ISP Management Company, Inc., 1361 Alps Road, Wayne, New Jersey
07470.

19

---

Item 11.    Executive Compensation

Summary Compensation Table

The following table sets forth the cash and non-cash compensation for each of the last three fiscal years awarded to or earned by our Chief Executive
Officer in 2003 and the four other most highly compensated executive officers who were employed by us or our subsidiaries as of December 31, 2003.

|                                                                            |  | Annual Compensation |  | Long-Term Compensation |                        
|--------------------------------------------------------------------------- |  | ------------------- |  | ---------------------- | -----------------------
|
|Sunil Kumar
President and
Chief Executive Officer                           |  | 2003
2002
2001      |  | $                      | 506,978
489,260
426,580
|Richard A. Weinberg
Executive Vice
President, General Counsel and Secretary |  | 2003
2002
2001      |  | $                      | 346,345
334,235
321,374
|Susan B. Yoss
Executive Vice
President-Finance and Treasurer                |  | 2003
2002
2001      |  | $                      | 299,735
289,230
278,100
|Neal E. Murphy
Senior Vice President
and Chief Financial Officer            |  | 2003
2002
2001      |  | $                      | 251,000
211,705
      
|Roger J. Cope
Senior Vice President
Sales and MarketingNorth America       |  | 2003
2002
2001      |  | $                      | 240,335
232,780
223,525

---

20

---



Options and Stock Appreciation Rights

The following table summarizes information with respect to the value of exercised and unexercised options to acquire shares of ISP common stock held by the
executive officers named in the Summary Compensation Table above at December 31, 2003. No stock options were granted to these executive officers during 2003.

Aggregated Option Exercises in 2003 and Value of ISP Common Stock Options at December 31, 2003(1)

|Name                |  | Shares Acquired on
Exercise (#) |  | Value Realized
($)(3) |         | Number of Securities
Underlying Unexercised ISP
Options At 12/31/03
Exercisable/Unexercisable |     | Value of Unexercised In-
the-Money ISP
Options At 12/31/03(2)
Exercisable/Unexercisable
|------------------- |  | ------------------------------- |  | --------------------- | ------- | --------------------------------------------------------------------------------------------- | --- | ---------------------------------------------------------------------------------------
|Sunil Kumar         |  | 100,000                         |  | $                     | 548,900 |                                                                                               | 0/0 |                                                                                        
|Richard A. Weinberg |  | 50,000                          |  | $                     | 269,750 |                                                                                               | 0/0 |                                                                                        
|Susan B. Yoss       |  |                                |  |                       |        |                                                                                               | 0/0 |                                                                                        
|Neal E. Murphy      |  |                                |  |                       |        |                                                                                               | 0/0 |                                                                                        
|Roger J. Cope       |  | 55,605                          |  | $                     | 74,455  |                                                                                               | 0/0 |                                                                                        

---

21

---



Long-Term Incentive Plans

ISP 2000 Long-Term Incentive Plan

The following table sets forth information on awards granted to the executive officers named in the Summary Compensation Table above during 2003 under the 2000
LTI Plan.

2000 LTI PlanAwards in 2003

|                    |  |         |  |   |  | Estimated Future Payouts Under
Non-Stock Price-Based Plans
|------------------- |  | ------- |  | - |  | ----------------------------------------------------------
|
|
|Sunil Kumar         |  | 750,000 |  |  |  | $                                                         
|Richard A. Weinberg |  |        |  |  |  | $                                                         
|Susan B. Yoss       |  |        |  |  |  | $                                                         
|Neal E. Murphy      |  | 100,000 |  |  |  | $                                                         
|Roger J. Cope       |  | 100,000 |  |  |  | $                                                         
|                    |  | 30,000  |  |  |  | $                                                         

---

ISP 2003 Executive Long-Term Incentive Plan

The following table sets forth information on awards granted to the executive officers named in the Summary Compensation Table above during 2003 under the 2003
ELTI Plan.

22

---

2003 ELTI PlanAwards in 2003

|                    |  |         |     |   |  | Estimated Future Payouts Under
Non-Stock Price-Based Plans
|------------------- |  | ------- | --- | - |  | ----------------------------------------------------------
|
|
|Sunil Kumar         |  | 600,000 |     |  |  | $                                                         
|                    |  | 292,947 | (5) |  |  |                                                           
|Richard A. Weinberg |  | 300,000 |     |  |  | $                                                         
|                    |  | 195,390 | (6) |  |  |                                                           
|Susan B. Yoss       |  | 200,000 |     |  |  | $                                                         
|                    |  | 65,913  | (5) |  |  |                                                           
|Neal E. Murphy      |  | 30,000  |     |  |  | $                                                         
|Roger J. Cope       |  | 30,000  |     |  |  | $                                                         

---

Deferred Compensation Plan

ISP maintains the ISP EDC Plan for a select group of management, including the named executive officers and other key employees. The ISP EDC Plan allows
participants, who are selected by the administrative committee that manages and administers the plan, which is referred to in the plan as the Deferred Compensation Committee, to elect annually to
defer, through payroll deduction, up to 25% of their annual base salary, up to 100% of their annual bonus and up to 100% of the income from their exercise of long-term incentive units for
each plan year, which is referred to in the plan as the Annual Deferral Amount. Annual Deferral Amounts are contributed by ISP to a grantor trust, which ISP is the grantor. The grantor trust's assets
will be used to pay benefits to participants if ISP remains solvent, but can be reached by creditors if ISP becomes insolvent.

23

---

A
participant is required to file a deferral agreement prior to the beginning of the plan year to which it relates and once filed may not be amended or revoked after the beginning
of the respective plan year. Each participant may determine how his or her Annual Deferral Amount will be deemed to be invested by choosing among several investment funds or indices designated by the
Deferred Compensation Committee. The entire Annual Deferral Amounts of each participant are always fully vested and non-forfeitable. The participant's account may be distributed to the
participant upon termination of employment for any reason, including the participant's death or disability. Under certain circumstances, which include a change in control or unforeseeable emergency, a
distribution to a participant may be made other than for termination of employment, death or disability. See Note (7), "Summary Compensation Table."

Compensation of Directors

Our directors do not receive any additional compensation for their service as directors.

Compensation Committee Interlocks and Insider Participations

We do not have a separate compensation committee. Compensation policies are established by our board of directors, each member of which is also one of our
executive officers. See Item 13, "Certain Relationships and Related Transactions."

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Securities Authorized for Issuance Under Equity Compensation Plans

Not applicable.

Security Ownership of Certain Beneficial Owners and Management

As of March 23, 2004, 100% of our outstanding shares of common stock were owned of record by ISP. As of that date, Mr. Samuel J. Heyman beneficially
owned (as defined in Rule 13d-3 of the Exchange Act) 100% of the capital stock of ISP.

No
other person known to us owns beneficially more than 5% of our common stock outstanding on that date and, other than Mr. Heyman, no directors or executive officers beneficially
owns any capital stock of ISP. The business address for Mr. Heyman is 1361 Alps Road, Wayne, New Jersey 07470.

Item 13.    Certain Relationships and Related Transactions

Management Agreement

Pursuant to a management agreement, we provide, through a subsidiary, certain general management, administrative, legal, telecommunications, information and
facilities services to BMCA and ISP. Charges by us for providing such services aggregated $6.3 million in 2003. The management agreement charges consist of management fees and other
reimbursable expenses attributable to or incurred by us, for the benefit of BMCA and are based on an estimate of the costs we incur to provide those services. We 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. The management agreement is expected to be amended to extend the term
of the agreement, effective January 1, 2004 through December 31, 2004. Based on the services provided by us in 2003 under the management agreement, the aggregate amount payable to us
under the management agreement for 2004 is expected to be approximately $5.6 million.

24

---



Some of our executive officers perform services for our affiliates pursuant to the management agreement, and we are reimbursed therefor by virtue of the management fees and other
reimbursable expenses payable under the management agreement.

Although,
due to the unique nature of the services provided under the management agreement, comparisons with third party arrangements are difficult, we believe that the terms of the
management agreement, taken as a whole, are no less favorable to us than could be obtained from an unaffiliated third party.

Tax Sharing Agreement

ISP and certain of its subsidiaries were parties to tax sharing agreements with members of the consolidated tax group for federal income tax purposes that
included G-I Holdings, which we refer to as the G-I Holdings Group, in certain prior years and, accordingly, would be severally liable for any tax liability of the
G-I Holdings Group in respect of those prior years. Until January 1, 1997, ISP and certain of its subsidiaries were members of the G-I Holdings Group. Therefore, such
tax sharing agreements are no longer applicable with respect to the tax liabilities of ISP for periods subsequent to January 1, 1997. ISP and certain of its subsidiaries remain obligated,
however, with respect to tax liabilities imposed or that may be imposed for periods prior to such date.

Effective
January 1, 2001, ISP entered into a tax sharing agreement with two of its subsidiaries one of which is us (individually, "subsidiary" or collectively, "subsidiaries")
with respect to payment of federal income taxes and certain related matters. The tax sharing agreement is substantially similar to the 1997 tax sharing agreement described hereinafter. During the term
of the 1997 tax sharing agreement, which will extend for as long as ISP or any of its domestic subsidiaries, as the case may be, are included in a consolidated federal income tax return filed by ISP
or a successor entity, a subsidiary is obligated to pay to ISP an amount equal to the amount of federal income taxes the subsidiary would have incurred if, subject to specific exceptions, the
subsidiary (on behalf of itself and its domestic subsidiaries) filed its own consolidated income tax return. The 1997 tax sharing agreement provides for analogous principles to be applied to any
consolidated, combined or unitary state or local income taxes. Under the 1997 tax sharing agreement, ISP makes all decisions with respect to all matters relating to the subsidiary's obligations with
respect to federal and state taxes. The provisions of the 1997 tax sharing agreement take into account both the federal income taxes such subsidiary would have incurred if the subsidiary filed its own
separate federal income tax return and the fact that the subsidiary is a member of the ISP Group (as defined) for federal income tax purposes.

Sales to Affiliates

In May 2003, we entered into a long-term requirements contract where BMCA and its subsidiaries purchase from us all of their colored roofing
granules and algae-resistant granules requirements, except for the requirements of certain of their roofing plants that are supplied by third parties. The contract includes pricing discounts based on
volume purchase targets, which, if the highest discount levels are reached over the term of the contract, could adversely impact gross margins for our mineral products segment. In 2003, BMCA and its
subsidiaries purchased in the aggregate a total of $77.7 million of mineral products from us, representing 8.7% of our total net sales and 74.7% of our net sales of mineral products.

Affiliate Borrowings

From time to time and as permitted, there are intercompany borrowings and repayments between or among us, our subsidiaries, affiliates and our parent, ISP. In
March 2003, ISP entered into an intercompany borrowing arrangement with ISP Investco and one of its subsidiaries where ISP Investco and its subsidiary loaned ISP a total of $94 million
of their unrestricted funds to enable ISP to pay

25

---

certain
costs and expenses related to ISP's going private transaction. This intercompany borrowing arrangement was made through a series of notes with interest of 1.65% per year and maturity dates
ranging from six months to three years. In December 2003, ISP repaid $35 million of the total amount borrowed representing full payment of the amount borrowed from ISP Investco's
subsidiary. Also in December 2003, ISP Investco entered into a new intercompany borrowing arrangement with ISP for an amount of up to $35 million. This borrowing arrangement has a term
of 10 years and accrues interest at a fixed rate of 5.12% per annum. The outstanding balance due from ISP to ISP Investco at December 31, 2003 aggregated approximately
$95.5 million.

In
July 2003, we agreed to loan, from time to time to a subsidiary of ISP, the principal amount of up to $50 million with interest on any outstanding principal balance of
1.65% per year. All borrowings under this arrangement are due and payable to us no later than July 28, 2006. The borrowings outstanding under this arrangement at December 31, 2003
aggregated approximately $31.2 million.

See
"Management's Discussion and Analysis of Financial Condition and Results of Operations- 2003 compared with 2002" and Note 13 to our consolidated financial statements included
in this annual report on Form 10-K for additional information regarding related party transactions.

Certain Other Transactions

In connection with becoming President and Chief Executive Officer of ISP in June 1999, Mr. Kumar was granted the right to purchase, and did
purchase, 318,599 shares of ISP common stock for an aggregate purchase price of $3,046,762. Under the purchase agreement, ISP loaned to Mr. Kumar the funds required to purchase the shares,
which loan was evidenced by a recourse promissory note in the principal amount of $3,046,762. The loan was converted to a demand note bearing interest at the lowest applicable federal rate for
short-term instruments. The principal amount of the loan was payable in four installments on each June 11 of the years 2001, 2002 and 2003 and on January 11, 2004, the first
three of which were in the amount of $761,691 and the last of which is for the balance of the remaining outstanding principal amount. Under the terms of the demand note, if Mr. Kumar remained
continuously employed by ISP or any of its subsidiaries through each installment payment date, the principal amount due on such installment payment date will be forgiven. Mr. Kumar has remained
continuously employed by ISP through each installment payment date, and therefore the principal amount due on each installment payment date has been forgiven.

In
January 2002, Mr. Kumar was awarded 250,000 shares of restricted common stock of ISP. In accordance with the terms of ISP's going private transaction, Mr. Kumar
was eligible to receive cash payments of $2,575,000, subject to certain vesting restrictions, in exchange for surrendering and cancellation of these restricted shares of ISP's common stock. In
May 2003, Mr. Kumar agreed to the cancellation of these cash payments in exchange for a grant of incentive units under the 2003 ELTI Plan. See "Long-Term Incentive
Plans2003 ELTI Plan" for additional information.

In
January 2001, July 2001, January 2002 and July 2002, we made loans bearing interest at the lowest applicable federal rate for short-term
instruments to Ms. Yoss in the principal amounts of $44,282, $78,855, $71,349 and $57,461, respectively, to enable her to satisfy certain withholding tax obligations in connection with her
award of 150,000 shares of restricted common stock of ISP, 18,750 shares of which vested on each of January 1, 2001, July 1, 2001, January 1, 2002, July 1, 2002 and
January 1, 2003. The remaining shares were to vest in 12.5% increments every six months thereafter until full vesting on July 1, 2004, subject to specified terms and conditions. Each
loan was paid in full, together with accrued interest, on April 11, 2003. In accordance with ISP's going private transaction, the remaining unvested restricted shares of ISP common stock were
cancelled in exchange for the right to receive cash payments of $1,545,000, subject to certain vesting restrictions, in exchange for the surrender and cancellation of these restricted shares of ISP's
common stock. In May 2003, Ms. Yoss agreed to cancel her right to receive these cash payments in exchange for a grant of incentive units

26

---

under
the 2003 ELTI Plan. See "Long-Term Incentive Plans2003 ELTI Plan" for additional information.

ISP
Investco invests primarily in international and domestic securities of companies involved in acquisition or reorganization transactions. ISP Investco generally makes these
investments at the same time and price that certain investment partnerships controlled by Mr. Heyman and his family are making similar investments. Management of this investment activity is
provided by personnel of the Heyman investment partnerships, including Mr. Heyman, assisted by certain of our personnel, at no cost or charge to either party.

As
a result of ISP's going private transaction that was completed in February 2003, ISP's common stock is no longer publicly traded and Mr. Heyman is now the beneficial
owner (as defined in Rule 13d-3 under the Exchange Act) of 100% of ISP's common stock and our common stock. Following the completion of ISP's going private transaction, ISP's common
stock was delisted from the New York Stock Exchange and its registration with the Securities and Exchange Commission was terminated.

Item 14.    Principal Accountant Fees and Services

The following table presents fees for professional services rendered by our independent public accountants, KPMG LLP, for the fiscal years ended
December 31, 2002 and 2003.

Audit and Non-Audit Fees(1)

2002

2003(dollars in thousands)Audit Fees(2)

$
664

$
677Audit-Related Fees(3)


27


50Tax Fees(4)


250


413All Other Fees





Total

$
941

$
1,140


---

Policy on Pre-Approval of Audit and Non-Audit Services Performed by the Independent Auditors

Our Board of Directors approves, prior to the audit engagement, consistent with the Sarbanes-Oxley Act of 2002 and the requirements of the Securities and Exchange
Commission, any audit, audit-related and permitted non-audit services reasonably likely to be required by us from KPMG during the coming fiscal year. The Board may delegate the approval of
unanticipated (but otherwise permitted) non-audit services during the coming fiscal year to our principal financial or accounting officer as required.

27

---



PART IV

Item 15.    Exhibits, Financial Statement Schedules and Reports on Form 8-K

The following documents are filed as part of this report:



|Exhibit
Number |  |   |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-------------- |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1            |  |  |  | Certificate of Incorporation of International Specialty Holdings Inc. (incorporated by reference to Exhibit 3.1 to Amendment No. 2 to the Registration Statement on Form S-4 of International Specialty Holdings Inc.
(Registration No. 333-82822) (the "IS Holdings S-4"))                                                                                                                                                                                                                                                             
|3.2            |  |  |  | By-laws of International Specialty Holdings Inc. (incorporated by reference to Exhibit 3.2 to the IS Holdings S-4)                                                                                                                                                                                                                                                                                                                                                                                                                      
|4.1            |  |  |  | Indenture, dated as of December 13, 2001, between International Specialty Holdings Inc., as issuer and Wilmington Trust Company, as trustee (incorporated by reference to Exhibit 4.4 to ISP's Annual Report on Form 10-K for the fiscal year ended
December 31, 2001 (the "ISP 2001 Form 10-K")).                                                                                                                                                                                                                                      
|4.2            |  |  |  | Form of Notes (included in Exhibit 4.1) (incorporated by reference to Exhibit 4.4 to the ISP 2001 Form 10-K).                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.3            |  |  |  | Indenture, dated as of June 27, 2001, between ISP Chemco Inc., ISP Chemicals Inc., ISP Minerals Inc. and ISP Technologies Inc., as issuers, the subsidiary guarantors party thereto, and Wilmington Trust Company, as trustee (incorporated by reference
to Exhibit 4.1 to the Registration Statement on Form S-4 of ISP Chemco Inc. (Registration No. 333-70144) (the "ISP Chemco S-4")).                                                                                                                                              
|4.4            |  |  |  | Amendment No. 1 to Indenture, dated as of November 13, 2001, between ISP Chemco Inc., ISP Chemicals Inc., ISP Minerals Inc. and ISP Technologies Inc., as issuers, the subsidiary guarantors party thereto, and Wilmington Trust Company, as trustee
(incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-4 of ISP Chemco Inc. (Registration No. 333-75574) (the "Second ISP Chemco S-4").                                                                                                                 
|10.1           |  |  |  | Tax Sharing Agreement, dated as of January 1, 2001, by and among International Specialty Products Inc., International Specialty Holdings Inc. and ISP Chemco Inc. (incorporated by reference to Exhibit 10.8 to the Second ISP Chemco S-4).                                                                                                                                                                                                                                                                                             
|10.2           |  |  |  | Amended and Restated Management Agreement, dated as of January 1, 1999, by and among GAF Corporation, G-I Holdings Inc., G Industries Corp., Merick Inc., GAF Fiberglass Corporation, International Specialty Products Inc., GAF Building Materials
Corporation, GAF Broadcasting Company, Inc., Building Materials Corporation of America and ISP Opco Holdings Inc. (incorporated by reference to Exhibit 10.1 to Building Materials Corporation of America's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998).
|               |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

28

---

|10.3  |  |  |  | Amendment No. 1 to the Amended and Restated Management Agreement, dated as of January 1, 2000 by and among GAF Corporation, G-I Holdings Inc., G Industries Corp., Merick Inc., GAF Fiberglass Corporation, International Specialty Products Inc., GAF
Building Materials Corporation, GAF Broadcasting Company, Inc., Building Materials Corporation of America and ISP Opco Holdings Inc., as assignee of International Specialty Products Inc. (incorporated by reference to Exhibit 10.2 to ISP's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999 (the "ISP 1999 Form 10-K")).
|----- |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.4  |  |  |  | Amendment No. 2 to the Amended and Restated Management Agreement, dated as of January 1, 2001 by and among G-I Holdings Inc., Merick Inc., International Specialty Products Inc., GAF Broadcasting Company, Inc., Building Materials Corporation of
America and ISP Opco Holdings Inc., as assignee of International Specialty Products Inc. (incorporated by reference to Exhibit 10.3 to ISP's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (the "ISP 2000 Form 10-K")
).                                                                                                    
|10.5  |  |  |  | Amendment No. 3 to the Amended and Restated Management Agreement, dated as of June 27, 2001 by and among G-I Holdings Inc., Merick Inc., International Specialty Products Inc., ISP Investco LLC, GAF Broadcasting Company, Inc., Building Materials
Corporation of America and ISP Management Company, Inc., as assignee of ISP Chemco Inc. (incorporated by reference to Exhibit 10.7 to the Chemco S-4).                                                                                                                                                                                              
|10.6  |  |  |  | Amendment No. 4 to the Management Agreement, dated as of January 1, 2002 by and among G-I Holdings Inc., Merick Inc., International Specialty Products Inc., ISP Investco LLC, GAF Broadcasting Company, Inc., Building Materials Corporation of America
and ISP Management Company, Inc., as assignee of ISP Chemco Inc. (incorporated by reference to Exhibit 10.5 to ISP's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (the "ISP 2001 Form 10-K")).                                                                                                                        
|10.7  |  |  |  | Amendment No. 5 to he Management Agreement, dated as of January 1, 2003 by and among G-I Holdings Inc., Merick Inc., International Specialty Products Inc., ISP Investco LLC, GAF Broadcasting Company, Inc., Building Materials Corporation of America
and ISP Management Company, Inc., as assignee of ISP Chemco Inc. (incorporated by reference to Exhibit 10.1 to the IS Holdings Form 10-Q for the Quarterly Period ended March 30, 2003).                                                                                                                                                         
|10.8  |  |  |  | Indemnification Agreement, dated as of October 18, 1996, among GAF Corporation, G-I Holdings Inc., ISP Holdings Inc., G Industries Corp. and GAF Fiberglass Corporation (incorporated by reference to Exhibit 10.7 to the Registration Statement on Form
S-4 of ISP Holdings (Registration No. 333-17827).                                                                                                                                                                                                                                                                                               
|10.9  |  |  |  | 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. 333-40351)).                                                                                                                                                                                                                                                                                                                                                                                             
|10.10 |  |  |  | Credit Agreement, dated as of June 27, 2001, between ISP Chemco Inc., ISP Chemicals Inc., ISP Minerals Inc. and ISP Technologies Inc., as borrowers, the subsidiary guarantors party thereto, the lenders party thereto, The Chase Manhattan Bank, as
administrative agent, J.P. Morgan Securities Inc., as advisor, lead arranger and bookrunner, Bear Stearns Corporate Lending Inc. and UBS Warburg LLC, as co-syndication agents, and Deutsche Bank Alex. Brown Inc. and The Bank of Nova Scotia, as
co-documentation agents (incorporated by reference to Exhibit 10.1 to the Chemco S-4).          
|      |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

29

---

|10.11 |  |  |  | Amendment No. 1 to Credit Agreement, dated as of July 24, 2001, by and among ISP Chemco Inc., ISP Chemicals Inc., ISP Technologies Inc. and ISP Minerals Inc., as borrowers, and The Chase Manhattan Bank, as administrative agent (incorporated by
reference to Exhibit 10.2 to the Chemco S-4).                                                                                                                                                                                                                                                                               
|----- |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.12 |  |  |  | Pledge and Security Agreement, dated as of June 27, 2001, among ISP Chemco Inc., ISP Chemicals Inc., ISP Minerals Inc. and ISP Technologies Inc., as borrowers, the subsidiary guarantors party thereto, The Chase Manhattan Bank, as administrative agent,
 J.P. Morgan Securities Inc., as advisor, lead arranger and bookrunner, Bear Stearns Corporate Lending Inc. and UBS Warburg LLC, as co-syndication agents, and Deutsche Bank Alex. Brown Inc. and The Bank of Nova Scotia, as co-documentation agents
(incorporated by reference to Exhibit 10.3 to the Chemco S-4).
|10.13 |  |  |  | International Specialty Products Inc. 2000 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the IS Holdings Form 10-Q for the Quarterly Period ended June 29, 2003).                                                                                                                                                                                                                                                                                                                                                                                      
|10.14 |  |  |  | International Specialty Products Inc. 2003 Executive Long-Term Incentive Plan (incorporated by reference to Exhibit 10.2 to the IS Holdings Form 10-Q for the Quarterly Period ended June 29, 2003).                                                                                                                                                                                                                                                                                                                                                                            
|16    |  |  |  | Letter dated June 21, 2002 from Arthur Andersen LLP to the Securities and Exchange Commission regarding the change in certifying accountant (incorporated by reference to Exhibit 16 to IS Holdings current report on Form 8-K filed June 24,
2002).                                                                                                                                                                                                                                                                                                                            
|21*   |  |  |  | Subsidiaries of International Specialty Holdings Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|31.1* |  |  |  | Rule 13a-14(a)/Rule 15d-14(a) Certification of the Chief Executive Officer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|31.2* |  |  |  | Rule 13a-14(a)/Rule 15d-14(a) Certification of the Chief Financial Officer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|32.1* |  |  |  | Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

---

We
filed a current report on Form 8-K, dated October 30, 2003, reporting an event under Item 12 thereof. The information set forth in Item 12 of that
Form 8-K was furnished to the Securities and Exchange Commission and not "filed" pursuant to Section 18 of the Securities Exchange Act of 1934, as amended.

30

---



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 HOLDINGS INC.
| |  | -------------------------------------
| |  | By:                                  

Date:
March 23, 2004

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 23, 2004, by the following persons on behalf of the registrant and
in the capacities indicated.

|Signature                                 |  | Title                                                                          
|----------------------------------------- |  | -------------------------------------------------------------------------------
|                                          |  |                                                                                
|/s/SAMUEL J. HEYMANSamuel J. Heyman       |  | Chairman of the Board and Director                                             
|/s/SUNIL KUMARSunil Kumar                 |  | Chief Executive Officer, President and Director
(Principal Executive Officer)  
|/s/NEAL E. MURPHYNeal E. Murphy           |  | Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
|/s/KENNETH M. MCHUGHKenneth M. McHugh     |  | Vice President and Controller
(Principal Accounting Officer)                   
|/s/RICHARD A. WEINBERGRichard A. Weinberg |  | Director                                                                       

31

---

INTERNATIONAL SPECIALTY HOLDINGS INC.

FORM 10-K

INDEX TO MANAGEMENT'S DISCUSSION AND ANALYSIS,
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

|                                                                                            |                                               | Page
|------------------------------------------------------------------------------------------- | --------------------------------------------- | ----
|Management's Discussion and Analysis of Financial Condition and Results of Operations       |                                               | F-2 
|Selected Financial Data                                                                     |                                               | F-25
|Independent Auditors' Report                                                                |                                               | F-26
|Information Regarding Predecessor Independent Public Accountants' Report                    |                                               | F-27
|Consolidated Statements of Operations for the three years ended December 31, 2003           |                                               | F-28
|Consolidated Balance Sheets as of December 31, 2002 and 2003                                |                                               | F-29
|Consolidated Statements of Cash Flows for the three years ended December 31, 2003           |                                               | F-30
|Consolidated Statements of Shareholder's Equity for the three years ended December 31, 2003 |                                               | F-32
|Notes to Consolidated Financial Statements                                                  |                                               | F-34
|Supplementary Data (Unaudited):                                                             |                                               |     
|                                                                                            | Quarterly Financial Data (Unaudited)          |     
|SCHEDULES                                                                                  
|Consolidated Financial Statement Schedule:                                                  |                                               |     
|                                                                                            | Schedule IIValuation and Qualifying Accounts |     

F-1

---



INTERNATIONAL SPECIALTY HOLDINGS INC.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS

Overview

International Specialty Holdings Inc., a wholly owned subsidiary of International Specialty Products Inc., which we refer to as "ISP", was formed on
June 5, 2001 in connection with a corporate restructuring (see Note 1 to consolidated financial statements). The consolidated financial statements included elsewhere in this annual
report on Form 10-K have been prepared on a basis that retroactively reflects our formation for all periods presented. The net income presented up to the date that we were formed
has been reflected as dividends and/or distributions to ISP. Unless otherwise indicated by the context, "we," "us" and "our" refer to International Specialty Holdings Inc. and its consolidated
subsidiaries.

We
are a leading multinational manufacturer of a broad spectrum of specialty and industrial chemicals and mineral products. Over the last several years, we have increased our focus on
our higher margin consumer-oriented and service intensive businesses while consolidating and downsizing our low margin butanediol business and controlling costs. We have increased our
consumer-oriented focus through new, more profitable product offerings, enhanced technical capabilities and penetration into new markets. We also have supplemented our internal resources with
strategic alliances and complementary acquisitions. We improved our costs through operating efficiencies and plant consolidations.

Effective
January 1, 2003, we changed the composition of our reportable segments to be consistent with the current structure of our businesses. Consistent with the business focus
described above, we now report three business segments: specialty chemicals, industrial chemicals and mineral products. Sales and operating income by business segment for the years 2001 and 2002 have
been restated to conform to the 2003 presentation.

We
continually explore possible acquisitions where we seek to acquire complementary technologies or products, expand our customer base and leverage our sales and distribution
infrastructure and existing client relationships. For example, we acquired our alginates business and now provide naturally derived food thickeners and stabilizers to a variety of markets that
complement our existing products and technology, such as pharmaceutical ingredients, food and beverage markets. We also acquired our industrial biocides business that includes a product line of
fungicides, preservatives, algaecides and biocides to expand our performance chemicals product line.

Our
net sales for 2003 were $892.9 million, an increase of 6% from sales of $845.3 million in 2002. Our operating income, after excluding certain other operating gains and
charges in each year (see "Non-GAAP Financial Measures" below), increased by 8% in 2003 to $132.4 million from $123.0 million in 2002.

Critical Accounting Policies

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires our
management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent liabilities. On an on-going
basis, we evaluate our estimates, including but not limited to those related to doubtful accounts, inventory valuation, investments, goodwill and intangible assets, income taxes, environmental
liabilities, pensions and other postemployment benefits, and contingent liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from

F-2

---

these estimates under different assumptions or conditions. We do not anticipate any changes in management estimates that would have a material impact on our operations,
liquidity or capital resources. We believe the following critical accounting policies are the most important to the portrayal of our financial condition and results of operations and require our
management's more significant judgments and estimates in the preparation of our consolidated financial statements.



We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Management continuously
assesses the financial condition of our customers and the markets in which these customers participate and adjusts credit limits or the allowance for doubtful accounts based on this periodic review.
If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, our ability to collect on accounts could be negatively impacted, in which
case additional allowances may be required.



Inventories are valued at the lower of cost or market. The LIFO (last-in, first-out) method is utilized to determine cost for
substantially all domestic acetylene-based finished goods and work-in-process and the raw materials to produce these products. All other inventories are valued on the FIFO
(first-in, first out) method. We write down our inventories for estimated obsolescence or unmarketable inventories equal to the difference between the cost of inventories and their
estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory
write-downs may be required.



Our investment strategy is to seek returns in excess of money market rates on our available cash while minimizing market risks. There can be no assurance that we
will be successful in implementing such a strategy. We invest primarily in international and domestic securities of companies involved in acquisition or reorganization transactions. From time to time,
we invest in securities of companies that we consider to be undervalued. With respect to our equity positions, we are exposed to the risk of market loss.

Our
short-term investments are reported at fair value. For securities classified as "trading," unrealized holding gains and losses are reflected in the results of operations.
For securities classified as "available-for-sale," unrealized holding gains and losses, net of income tax effect, are included in a separate component of shareholder's equity,
"Accumulated other comprehensive income (loss)." The determination of cost in computing realized and unrealized gains and losses is based on the specific identification method. We periodically review
available-for-sale securities for other than temporary impairment when the cost basis of a security exceeds the market value. Declines in the value of these investments or
adverse changes in market conditions could result in impairment charges in the future.

F-3

---



Through December 31, 2001, we amortized goodwill and certain other intangible assets on a straight-line basis over the expected useful lives of
the underlying assets. In accordance with the provisions of Statement of Financial Accounting Standards, which we refer to as "SFAS," No. 142, "Goodwill and Other Intangible Assets," effective
January 1, 2002, goodwill is no longer being amortized over its estimated useful life. However, goodwill is subject to at least an annual assessment for impairment and more frequently if
circumstances indicate a possible impairment. Other intangible assets are being amortized over their useful lives. The useful life of an intangible asset is based on management's assumptions regarding
the expected use of the asset and other assumptions. If events or circumstances indicate that the life of an intangible asset has changed, it could result in higher future amortization charges or
recognition of an impairment loss.



The objective of accounting for income taxes is to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and
assets for the future tax consequences of events that have been recognized in our financial statements or tax returns. We account for our income taxes under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates that are expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.

In
the determination of our current year tax provision, we assume that all foreign earnings are remitted to the United States, net of applicable foreign tax credits, and since upon
remittance such earnings are taxable, we provide federal income taxes on income from our foreign subsidiaries. Since significant judgment is required to assess the future tax consequences of events
that have been recognized in our financial statements or tax returns, we consider such estimates to be critical to the preparation of our financial statements.

We
believe that our current assumptions and other considerations used to estimate the current year effective rate and deferred tax positions are appropriate. However, if the actual
outcome of future tax consequences differs from our estimates and assumptions, the resulting change to the provision for income taxes could have a material adverse impact on our consolidated financial
statements. A 1% change in the effective tax rate would change the 2003 income tax provision by $0.6 million.



We accrue environmental costs when it is probable that we have incurred a liability and the expected amount can be reasonably estimated. The amount accrued
reflects our assumptions about remedial requirements at the contaminated site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potential responsible parties at
multi-party sites, and the number and financial viability of other potentially responsible parties. Adverse decisions or events, particularly as to increases in remedial costs, discovery of new
contamination, assertion of natural resource damages, plans for development of our Linden, New Jersey property, and the liability and the financial responsibility of our insurers and of the other
parties involved at each site and their insurers, could

F-4

---

cause
us to increase our estimate of liability or decrease our estimate of insurance recoveries in respect of those matters. It is not currently possible to estimate the amount or range of any
additional liability. We recognize receivables for estimated environmental insurance recoveries that relate to both past expenses and estimated future liabilities. After considering the relevant legal
issues and other pertinent factors, we believe that we will receive the estimated insurance recoveries and that the insurance recoveries could be in excess of the current estimated liability for all
environmental claims, although there can be no assurance in this regard. Significant judgment is involved in estimating environmental liabilities and related insurance recoveries. See Note 21
to consolidated financial statements for further discussion with respect to environmental liabilities and estimated insurance recoveries.



We maintain defined benefit plans that provide eligible employees with retirement benefits. In addition, while we generally do not provide postretirement medical
and life insurance benefits, we subsidize such benefits for certain employees and certain retirees. The costs and obligations related to these benefits reflect our assumptions related to general
economic conditions (particularly interest rates), expected return on plan assets, and rate of compensation increases for employees. We set the discount rate assumption annually for our
retirement-related benefit plans at the measurement dates to reflect the yield of high-quality fixed-income debt instruments. The expected long-term rate of return on assets is
derived from a detailed periodic study conducted by our actuaries and our financial management. The study includes a review of anticipated future long-term performance of individual asset
categories. While the study gives appropriate consideration to recent plan performance and historical returns, the assumption is primarily a long-term prospective rate. We revised the
expected long-term rate of return assumption for our domestic hourly retirement plan in 2003 to 9.5%, a reduction from its previous level of 11.0%. A 25 basis points increase or decrease
in the discount rate would result in a plus or minus $0.1 million annual impact on pension expense and a plus or minus $0.9 million impact on the projected benefit obligation. A 25 basis
points increase or decrease in the expected long-term rate of return on assets would result in a plus or minus $0.1 million annual impact on pension expense.

Projected
health care benefits additionally reflect our assumptions about health care cost trends. The cost of providing plan benefits also depends on demographic assumptions including
retirements, mortality, turnover, and plan participation. If actual experience differs from these assumptions, the cost of providing these benefits could increase or decrease.

Results of Operations



We recorded net income of $42.4 million for the year 2003 compared with a net loss of $104.7 million in 2002. The results for 2003 include a
$1.0 million after-tax cumulative effect of a change in accounting principle from the adoption of SFAS No. 143, "Accounting for Asset Retirement Obligations." The results for
2002 included a $155.4 million goodwill impairment charge, effective January 1, 2002, for the cumulative effect of a change in accounting principle related to the adoption of SFAS
No. 142, "Goodwill and Other Intangible Assets."

F-5

---

Income
before the cumulative effect of changes in accounting principles was $43.4 million in 2003 compared with $50.7 million in 2002. The results for 2003 include
$3.6 million of other operating charges, including a $2.1 million charge for the write-off of production assets related to a discontinued product in the industrial chemicals
business segment and a $1.5 million charge for stock option payments related to ISP's going private transaction in the first quarter of 2003 (see Note 17 to consolidated financial
statements). The results for 2002 included $12.2 million of other operating gains related to the sale of our FineTech business and to the termination and settlement of contracts and a
$7.6 million other operating charge for the write-off of deferred costs related to our Linden, New Jersey property (see Note 6 to consolidated financial statements). The year
2002 also included a $7.2 million pre-tax charge for the early retirement of debt.

As
previously discussed, effective January 1, 2003, we changed the composition of our reportable segments to be consistent with the current structure of our businesses. Sales and
operating income by business segment for the year 2002 have been restated to conform to the 2003 presentation.

Net Sales.Net sales by business segment for the years 2002 and 2003 were:

Year Ended December 31,2002

2003(Millions)Specialty chemicals

$
600.8

$
623.4Industrial chemicals


149.4


165.5Mineral products


95.1


104.0Net sales

$
845.3

$
892.9


Net
sales for 2003 were $892.9 million compared with $845.3 million in 2002. The $47.6 million (6%) increase in sales resulted from higher unit volumes in the
industrial chemicals and mineral products segments (totaling $24.0 million) and in the pharmaceutical, food, beverage and personal care product lines of the specialty chemicals segment
(totaling $19.0 million) and from the favorable impact of the weaker U.S. dollar, primarily in Europe ($40.8 million). These sales gains were partially offset by lower pricing in
industrial chemicals, mineral products and personal care (totaling $13.9 million) and lower volumes in the fine chemicals and performance chemicals product lines of the specialty chemicals
segment (totaling $22.3 million). On a geographic region basis, sales increased by 16% in Europe, 9% in Asia-Pacific and 7% in Latin America and decreased by 1% in North America.

Gross Margin.Our gross margin in 2003 was 34.6% compared with 34.8% in 2002. The gross margin for the specialty chemicals
segment increased to 43.0% in 2003 compared with 39.3% in 2002 as a result of higher volumes, manufacturing efficiencies and the favorable impact of the weaker U.S. dollar. The overall reduction in
gross margin resulted primarily from the unfavorable effect of the lower pricing in the industrial chemicals and mineral products segments, unfavorable manufacturing costs in mineral products and the
impact of lower volumes in the fine chemicals product line.

Selling, General and Administrative.Selling, general and administrative expenses increased 3% in 2003 to
$176.1 million from $170.9 million in 2002, however, as a percent of sales, decreased to 19.7% in 2003 from 20.2% in 2002. The increase in selling, general and administrative expenses in
2003 related primarily to higher selling and distribution costs as a result of the higher sales levels and the

F-6

---

impact
of the weaker U.S. dollar, and also to higher administrative and general expenses due to increased compensation-related costs.

Other operating gains and (charges).Other operating charges in 2003 totaled $3.6 million and included a
$1.5 million charge for compensation expense for stock option payments related to ISP's going private transaction (see Note 17 to consolidated financial statements). In addition, in
December 2003, we decided to discontinue the manufacturing process at our Texas City, Texas facility for a product within the industrial chemicals segment. Accordingly, we recorded a
$2.1 million charge for the write-off of production assets related to that manufacturing process. Sales related to this discontinued product were not material.

Other
operating gains in 2002 included $12.2 million of other operating gains, including a $5.5 million gain on the sale of our FineTech business and $6.8 million of
gains from the termination and settlement of contracts. Offsetting these gains was a $7.6 million other operating charge for the write-off of deferred costs related to our Linden,
New Jersey property. The write-off related to deferred costs associated with the study and exploration of developing a hazardous waste treatment, storage and disposal facility at the
Linden site. This alternative use scenario became less likely with the progress made on other development opportunities at this site. See also Note 6 to consolidated financial statements.

Operating Income.Operating income by business segment for the years 2002 and 2003 was:

Year Ended December 31,2002

2003(Millions)Specialty chemicals

$
107.9

$
125.9Industrial chemicals


5.9


(11.5
)Mineral products


20.9


13.9Total segment operating income


134.7


128.3Unallocated corporate office items


0.5


0.5Write-off of deferred costs


(7.6
)

Operating income

$
127.6

$
128.8


Operating
income in 2003 was $128.8 million compared with $127.6 million in 2002. Excluding the other operating gains and (charges), net, discussed above, operating income
on a comparable basis was $132.4 million in 2003, a $9.4 million (8%) increase compared with $123.0 million in 2002 (see "Non-GAAP Financial Measures" below).

Operating
income for the specialty chemicals segment was $125.9 million for 2003 compared with $107.9 million in 2002. On a comparable basis, excluding the aforementioned
gains and charges pertaining to specialty chemicals, operating income for the segment improved 33% to $127.0 million compared with $95.7 million in 2002. The improved results were
primarily attributable to the personal care, pharmaceutical and beverage product lines (up a combined $36.2 million), mainly due to manufacturing efficiencies (totaling $8.9 million),
lower operating expenses (totaling $6.6 million) and higher volumes (a $4.7 million favorable impact). The weaker U.S. dollar in Europe also had a substantial positive impact on
operating income for the specialty chemicals segment in 2003 ($20.0 million).

F-7

---



INTERNATIONAL SPECIALTY HOLDINGS INC.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS (Continued)

The industrial chemicals segment recorded an operating loss of $11.5 million in 2003. Excluding the aforementioned other operating charges in 2003
pertaining to industrial chemicals, the operating loss in 2003 was $9.2 million compared with operating income of $5.9 million in 2002. The results were mainly attributable to lower
pricing, higher operating expenses and to the adverse impact of the stronger Euro and higher energy costs.

Operating
income for the mineral products segment was $13.9 million in 2003. On a comparable basis, excluding other operating charges in 2003 pertaining to mineral products,
operating income was $14.1 million for 2003 compared with $20.9 million in 2002. The 33% decline from 2002 was due to unfavorable manufacturing costs and, to a lesser extent, unfavorable
pricing, partially offset by higher volumes.

Interest Expense.Interest expense for 2003 was $75.8 million, a $9.1 million (11%) decrease from the
$84.9 million recorded in 2002. The lower interest expense was primarily attributable to lower average borrowings ($6.2 million impact) and, to a lesser extent, lower average interest
rates ($2.9 million impact).

Investment Income.Investment income in 2003 was $14.9 million compared with $48.1 million in 2002. Investment
income in 2002 included a $39.0 million other than temporary impairment charge for certain available-for-sale securities held in our investment portfolio. The lower
investment income resulted from realized portfolio losses in 2003, partially offset by higher unrealized gains.

Other Expense, net.Other expense, net, comprises 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 items of expense. Other expense, net, was $2.4 million in 2003 compared
with $6.9 million in 2002. The lower expense in 2003 was due primarily to favorable foreign
exchange as a result of the weaker U.S. dollar, mainly in Europe, partially offset by $0.9 million higher environmental liability provisions related to discontinued operations.

Income Taxes.In 2003, we recorded a provision for income taxes of $22.1 million. Our effective tax rate for 2003 was
33.7%, which was consistent with an effective tax rate of 34.0% for 2002.

Business Segment Review

A discussion of operating results for each of our business segments follows. We operate our business through three reportable business segments: specialty
chemicals; industrial chemicals; and mineral products. As discussed above, we changed the composition of our reportable segments, effective January 1, 2003. Sales and operating income by
business segment for the year 2002 have been restated to conform to the 2003 presentation. The operating income for each business segment discussed below is adjusted for the non-GAAP
financial measures in the table below. See Notes 19 and 20 to consolidated financial statements for additional business segment and geographic information.



The business segment review below and the discussion of operating income above contain information regarding non-GAAP financial measures contained
within the meaning of Item 10 of Regulation S-K promulgated by the Securities and Exchange Commission. As used herein, "GAAP" refers to accounting principles generally accepted in
the United States of America. We use non-GAAP financial measures to eliminate the effect of certain other operating gains and charges on reported operating income. Management believes that
these financial measures are useful to bondholders and financial institutions because such measures exclude transactions that are unusual due to their nature

F-8

---

or
infrequency and therefore allow bondholders and financial institutions to more readily compare our company's performance from period to period. Management uses this information in monitoring and
evaluating our company's performance and the performance of individual business segments. The non-GAAP financial measures included herein have been reconciled to the most directly
comparable GAAP financial measure as is required under Item 10 of Regulation S-K regarding the use of such financial measures. These non-GAAP financial measures should
be considered in addition to, and not as a substitute, or superior to, operating income or other measures of financial performance in accordance with accounting principles generally accepted in the
United States of America.

|                                               |                                                       | Year Ended
December 31, |      
|---------------------------------------------- | ----------------------------------------------------- | ----------------------- | -----
|
|
|Reconciliation of non-GAAP financial measures: |                                                       |                         |      
|Operating income per GAAP                      |                                                       | $                       | 127.6
|Non-GAAP adjustments:                          |                                                       |                         |      
|                                               | Less: Other operating (gains) charges(1)              |                         |      
|                                               |                                                       |                         |      
|Operating income as adjusted                   |                                                       | $                       | 123.0
|                                               |                                                       |                         |      
|Supplemental Business Segment Information:     |                                                       |                         |      
|Operating income:                              |                                                       |                         |      
|                                               | Operating income per GAAPSpecialty Chemicals         |                         | $    
|                                               | Non-GAAP adjustments(1)                               |                         |      
|                                               |                                                       |                         |      
|                                               | Operating incomeSpecialty Chemicals as adjusted      |                         | $    
|                                               |                                                       |                         |      
|                                               | Operating income (loss) per GAAPIndustrial Chemicals |                         | $    
|                                               | Non-GAAP adjustments(1)                               |                         |      
|                                               |                                                       |                         |      
|                                               | Operating incomeIndustrial Chemicals as adjusted     |                         | $    
|                                               |                                                       |                         |      
|                                               | Operating income per GAAPMineral Products            |                         | $    
|                                               | Non-GAAP adjustments(1)                               |                         |      
|                                               |                                                       |                         |      
|                                               | Operating incomeMineral Products as adjusted         |                         | $    
|                                               |                                                       |                         |      
|                                               | Total segment operating income as adjusted            |                         | $    
|                                               | Unallocated corporate office per GAAP                 |                         |      
|                                               |                                                       |                         |      
|                                               | Operating income as adjusted                          |                         | $    
|                                               |                                                       |                         |      

---

F-9

---



Sales for the specialty chemicals segment in 2003 were $623.4 million compared with $600.8 million in 2002. The $22.6 million (4%) increase
in sales was attributable to the favorable effect of the weaker U.S. dollar ($29.0 million) and higher unit volumes in the pharmaceutical, food, beverage and personal care product lines
(totaling $19.0 million). Partially offsetting these sales increases were lower unit
volumes in the fine chemicals and performance chemicals product lines (totaling $22.3 million), partially as a result of the loss of sales due to the termination of the supply and license
agreement in 2002 with Polaroid ($9.1 million), and unfavorable pricing ($3.8 million), primarily in the personal care product line. Favorable pharmaceutical volumes were primarily
attributable to strong growth in the oral care market in North America and the excipients markets (Plasdones for tablet binders and Polyplasdones for tablet disintegrants), while higher food volumes
resulted primarily from the acquisition of Germinal S.A. in May 2003 (see Note 18 to consolidated financial statements). Increased personal care volumes resulted from strong sales of
sunscreens in North America and Europe, while higher beverage volumes were due to growth in Europe and Asia-Pacific.

Operating
income for the specialty chemicals segment increased by 33% for the year 2003 to $127.0 million compared with $95.7 million in 2002. The improved results were
primarily attributable to the personal care, pharmaceutical and beverage product lines (up a combined $36.2 million), mainly due to manufacturing efficiencies (totaling $8.9 million),
lower operating expenses (totaling $6.6 million) and higher volumes (a $4.7 million favorable impact), partially offset by unfavorable pricing ($3.8 million in total for the
specialty chemicals segment). The weaker U.S. dollar in Europe also had a substantial positive impact on operating income for the specialty chemicals segment in 2003 ($20.0 million). The
improved results for this segment were adversely impacted by the impact of lower volumes in the fine chemicals product line ($6.2 million), mainly due to the loss of sales to Polaroid.



Sales for the industrial chemicals segment in 2003 were $165.5 million compared with $149.4 million in 2002. The 11% increase in sales was
attributable to higher unit volumes ($10.8 million) and the favorable effect of the weaker U.S. dollar ($11.8 million), partially offset by the continuing adverse effect of unfavorable
pricing ($6.4 million).

The
industrial chemicals segment recorded an operating loss of $9.2 million in 2003 compared with operating income of $5.9 million in 2002. The results for this business
have been adversely impacted by the stronger Euro on European-based manufacturing costs ($6.6 million). The unfavorable results also included higher energy costs and operating expenses
($8.0 million) and unfavorable pricing ($6.4 million), partially offset by manufacturing efficiencies ($4.9 million) and the impact of higher volumes ($1.6 million).

We
anticipate ongoing pressure on our pricing and revenue related to commodity type butanediol and related solvents and intermediates. A key competitor in this market completed
construction of additional production capacity in Europe for these products during the third quarter of 2002. Due to the large oversupply in the market, a new plant scheduled to be brought on stream
by another competitor at the end of 2003 has been delayed. The oversupply of these products to the merchant market is resulting in increased downward pressure on pricing.

F-10

---



Sales for the mineral products segment for 2003 were $104.0 million compared with $95.1 million in 2002. The 9% increase was due to higher unit
volumes ($13.3 million) and included $4.4 million (20%) of higher third party sales and $4.5 million (6%) of higher sales to Building Materials Corporation of America, an
affiliate, which we refer to as "BMCA." The sales growth was partially offset by lower pricing ($4.4 million) due to unfavorable customer contract pricing.

Operating
income for 2003 was $14.1 million compared with $20.9 million in 2002. The $6.8 million (33%) decrease in operating income was due to unfavorable
manufacturing costs ($7.5 million), primarily as a result of higher energy costs and to the unfavorable pricing ($4.4 million).

Results of Operations



We recorded a net loss of $104.7 million in 2002 compared with net income of $3.3 million in 2001. In accordance with the adoption of SFAS
No. 142, "Goodwill and Other Intangible Assets," we completed a transitional test for impairment of goodwill and, accordingly, recorded a $155.4 million charge, effective
January 1, 2002, for the cumulative effect of a change in accounting principle. The write-off represented the goodwill associated with the reporting units included in our specialty
chemicals and industrial chemicals business segments and was based upon our estimate of fair value for these businesses, considering expected future cash flows and profitability. The results for 2001
included an after-tax charge of $0.4 million for the cumulative effect of adopting SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."

Income
before the cumulative effect of changes in accounting principles was $50.7 million in 2002 compared with $3.7 million in 2001. The improved results in 2002 were
attributable to investment income of $48.1 million compared with $2.5 million of investment losses in 2001, $14.4 million higher operating income, $4.0 million lower
interest expense, $3.3 million higher other operating gains and (charges), net, and $9.2 million lower other expense, net. Year 2002 results also included a pre-tax charge of
$7.2 million on the early retirement of debt, while operating income for 2001 included $16.5 million of goodwill amortization, prior to the adoption of SFAS No. 142.

As
previously discussed, effective January 1, 2003, we changed the composition of our reportable segments to be consistent with the current structure of our businesses. Sales and
operating income by business segment for the years 2001 and 2002 have been restated to conform to the 2003 presentation.

Net Sales.Net sales by business segment for the years 2001 and 2002 were:

Year Ended December 31,2001

2002(Millions)Specialty chemicals

$
552.8

$
600.8Industrial chemicals


153.7


149.4Mineral products


80.7


95.1Net sales

$
787.2

$
845.3


Net
sales for 2002 were $845.3 million compared with $787.2 million in 2001. The $58.1 million (7%) increase in sales resulted primarily from the contribution to
sales from the biocides business

F-11

---

($31.4 million),
which we acquired on December 31, 2001, and higher unit volumes in the mineral products and industrial chemicals segments (totaling $23.9 million) and the
pharmaceutical and personal care product lines (totaling $23.1 million). The weaker U.S. dollar in Europe also had a favorable impact ($9.5 million) on net sales. Partially offsetting
these sales gains was lower pricing in the industrial chemicals segment and the fine chemicals and personal care product lines (totaling $26.3 million) and lower volumes in the fine chemicals
product line ($4.4 million). On a geographic region basis, sales increased by 10% in North America, 5% in Europe, 7% in Latin America and 3% in Asia-Pacific.

Gross Margin.Our gross margin in 2002 decreased to 34.8% from 36.4% in 2001. The reduction in gross margin resulted
primarily from the lower pricing in the industrial chemicals segment and the fine chemicals and personal care product lines and from unfavorable results in the fine chemicals product line due to the
Polaroid bankruptcy in the fourth quarter of 2001.

Selling, General and Administrative.Selling, general and administrative expenses increased 8% in 2002 to
$170.9 million from $158.1 million in 2001, however, as a percent of sales, remained almost level at 20.2% in 2002 versus 20.1% in 2001. The increase in selling, general and
administrative expenses in 2002 related primarily to the newly acquired biocides business, in addition to higher selling and distribution costs as a result of the higher sales levels.

Other operating gains and (charges), net.Other operating gains, net, in 2002 totaled $5.4 million and included
$12.2 million of other operating gains, including a $5.5 million gain on the sale of our FineTech business and $6.8 million of gains from the termination and settlement of
contracts. Offsetting these gains was a $7.6 million other operating charge for the write-off of deferred costs related to our Linden, New Jersey property. The write-off
related to deferred costs associated with the study and exploration of developing a hazardous waste treatment, storage and disposal facility at the Linden site. This alternative use scenario became
less likely with the progress made on other
development opportunities at this site. See also Note 6 to consolidated financial statements. Other operating gains in 2001 totaled $2.1 million and included a $1.6 million gain
on an insurance claim related to an industrial accident at one of our manufacturing facilities and a $0.5 million gain from the reversal of excess restructuring severance reserves from our year
2000 restructuring program.

Operating Income.Operating income by business segment for the years 2001 and 2002 was:

Year Ended December 31,2001

2002(Millions)Specialty chemicals

$
90.2

$
107.9Industrial chemicals


11.3


5.9Mineral products


10.7


20.9Total segment operating income


112.2


134.7Unallocated corporate office items


1.0


0.5Write-off of deferred costs





(7.6
)Operating income

$
113.2

$
127.6


Operating
income in 2002 was $127.6 million compared with $113.2 million in 2001. Excluding $4.6 million of other operating gains in 2002 and the $1.6 million
other operating gain in 2001 relating to the insurance claim, and also excluding $16.5 million of goodwill amortization in 2001, operating

F-12

---

income
on a comparable basis was $123.0 million in 2002, a $5.1 million (4%) decrease versus $128.1 million in 2001 (see "Non-GAAP Financial Measures" below). The
lower comparable operating results were primarily attributable to lower pricing in the industrial chemicals segment and the personal care product line (totaling $22.4 million), unfavorable
volumes, pricing and mix in the fine chemicals product line ($19.0 million) and higher manufacturing costs in the personal care product line ($5.5 million). Partially offsetting these
adverse factors was the contribution to income from the biocides business and the impact of higher volumes in the pharmaceutical and personal care product lines and the mineral products segment
(totaling $20.0 million) and favorable manufacturing efficiencies in the fine chemicals and performance chemicals product lines (totaling $9.1 million) and the mineral products and
industrial chemicals segments (totaling $4.9 million). The weaker U.S. dollar in Europe also had a positive impact on operating income in 2002 ($8.2 million).

Interest Expense.Interest expense for 2002 was $84.9 million, a $4.0 million (4.5%) decrease from the
$88.9 million recorded in 2001. The lower interest expense was attributable to lower average borrowings ($6.6 million impact), partially offset by higher average interest rates
($2.6 million impact).

Investment Income.Investment income in 2002 was $48.1 million compared with investment losses of $2.5 million
in 2001. Investment results for 2002 and 2001 reflect $39.0 and $27.6 million, respectively, of other than temporary impairment charges for certain available-for-sale
securities held in our investment portfolio.

Other Expense, net.Other expense, net, comprises 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 items of expense. Other expense, net, was $6.9 million in 2002 compared
with $16.1 million in 2001. The lower expense in 2002 was due primarily to favorable foreign exchange as a result of the weaker U.S. dollar, mainly in Europe.

Income Taxes.In 2002, we recorded a provision for income taxes of $26.1 million. Our effective tax rate for 2002 was
34.0%, relatively consistent with an effective tax rate of 35.5% for 2001.

Business Segment Review

A discussion of operating results for each of our business segments follows. We operate our business through three reportable business segments: specialty
chemicals; industrial chemicals; and mineral products. As discussed above, we changed the composition of our reportable segments, effective January 1, 2003. Sales and operating income by
business segment for the years 2002 and 2001 have been restated to conform to the 2003 presentation. The operating income for each business segment discussed below is adjusted for the
non-GAAP financial measures in the table below. See Notes 19 and 20 to consolidated financial statements for additional business segment and geographic information.



The business segment review below and the discussion of operating income above contain information regarding non-GAAP financial measures contained
within the meaning of Item 10 of Regulation S-K promulgated by the Securities and Exchange Commission. As used herein, "GAAP" refers to accounting principles generally accepted in
the United States of America. We use non-GAAP financial measures to eliminate the effect of certain other operating gains and charges on reported operating income. Management believes that
these financial measures are useful to bondholders and financial institutions because such measures exclude transactions that are unusual due to their nature or infrequency and therefore allow
bondholders and financial institutions to more readily compare our

F-13

---

company's
performance from period to period. Management uses this information in monitoring and evaluating our company's performance and the performance of individual business segments. The
non-GAAP financial measures included herein have been reconciled to the most directly comparable GAAP financial measure as is required under Item 10 of Regulation S-K
regarding the use of such financial measures. These non-GAAP financial measures should be considered in addition to, and not as a substitute, or superior to, operating income or other
measures of financial performance in accordance with accounting principles generally accepted in the United States of America.

|                                               |                                                   | Year Ended
December 31,            |      
|---------------------------------------------- | ------------------------------------------------- | ---------------------------------- | -----
|
|
|Reconciliation of non-GAAP financial measures: |                                                   |                                    |      
|Operating income per GAAP                      |                                                   | $                                  | 113.2
|Non-GAAP adjustments:                          |                                                   |                                    |      
|                                               | Add back: goodwill amortization                   |                                    |      
|                                               | Less: Other operating (gains) charges(1)          |                                    |      
|                                               |                                                   |                                    |      
|Operating income as adjusted                   |                                                   | $                                  | 128.1
|                                               |                                                   |                                    |      
|Supplemental Business Segment Information:     |                                                   |                                    |      
|Operating income:                              |                                                   |                                    |      
|                                               | Operating income per GAAPSpecialty Chemicals     |                                    | $    
|                                               | Non-GAAP adjustments:                             |                                    |      
|                                               |                                                   | Goodwill amortization              |      
|                                               |                                                   | Other operating (gains) charges(1) |      
|                                               |                                                   |                                    |      
|                                               | Operating incomeSpecialty Chemicals as adjusted  |                                    | $    
|                                               |                                                   |                                    |      
|                                               | Operating income per GAAPIndustrial Chemicals    |                                    | $    
|                                               | Non-GAAP adjustments:                             |                                    |      
|                                               |                                                   | Goodwill amortization              |      
|                                               |                                                   | Other operating (gains) charges(1) |      
|                                               |                                                   |                                    |      
|                                               | Operating incomeIndustrial Chemicals as adjusted |                                    | $    
|                                               |                                                   |                                    |      
|                                               | Operating income per GAAPMineral Products        |                                    | $    
|                                               | Non-GAAP adjustmentsgoodwill amortization        |                                    |      
|                                               |                                                   |                                    |      
|                                               | Operating incomeMineral Products as adjusted     |                                    | $    
|                                               |                                                   |                                    |      
|                                               | Total segment operating income as adjusted        |                                    | $    
|                                               | Unallocated corporate office per GAAP             |                                    |      
|                                               |                                                   |                                    |      
|                                               | Operating income as adjusted                      |                                    | $    
|                                               |                                                   |                                    |      

F-14

---



INTERNATIONAL SPECIALTY HOLDINGS INC.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS (Continued)

---



Sales for the specialty chemicals segment in 2002 were $600.8 million compared with $552.8 million in 2001. The $48.0 million (9%) increase
in sales was mainly attributable to the contribution to sales from the biocides business ($31.4 million) acquired at the end of 2001. In addition, the higher sales were attributable to higher
unit volumes in the pharmaceutical and personal care product lines (totaling $23.1 million). The weaker U.S. dollar in Europe also had a favorable impact ($6.4 million) on sales.
Favorable pharmaceutical volumes were primarily attributable to strong growth in the excipients market (Plasdones for tablet binders and Polyplasdones for tablet disintegrants) and the oral care
market. Increased personal care volumes resulted from strong growth in the skin care preservative/waterproofing market and in hair care products due to the styling gel/lotion market. Partially
offsetting these sales increases was lower pricing in the fine chemicals and personal care
product lines (totaling $8.0 million) and lower unit volumes in the fine chemicals product line ($4.4 million) as a result of the loss of sales due to the termination of the supply and
license agreement with Polaroid.

Excluding
the goodwill amortization in 2001 and other operating gains and (charges) discussed above, operating income for the specialty chemicals segment decreased by 5% for the year
2002 to $95.7 million compared with $100.8 million in 2002. The lower operating income for the specialty chemicals segment in 2002 was mainly attributable to lower operating results for
the fine chemicals product line, which decreased by $11.3 million in 2002 as a result of the impact of lower volumes and unfavorable pricing and mix (totaling $19.0 million), partially
offset by favorable manufacturing efficiencies ($5.4 million). In addition, operating income for the segment was adversely impacted by lower pricing, unfavorable manufacturing and inventory
costs and higher operating costs (totaling $11.7 million) in the personal care product line and higher operating expenses in the pharmaceutical and performance chemicals product lines (totaling
$6.9 million). Offsetting these negative factors in 2002 was the contribution to income from the newly acquired biocides business, the impact of higher volumes in the pharmaceutical and
personal care product lines (totaling $11.5 million) and the favorable effect on the segment's income from the weaker U.S. dollar in Europe ($5.6 million).



Sales for the industrial chemicals segment decreased by $4.3 million (3%) in 2002 to $149.4 million compared with $153.7 million in 2001 as a
result of unfavorable pricing ($18.3 million), partially offset by higher volumes ($10.8 million) and the favorable effect of the weaker U.S. dollar in Europe

F-15

---

($3.1 million).
Average market selling prices of butanediol decreased in 2002 compared with 2001 levels due to weakening demand and due to new capacity coming on stream in Europe. Operating
income for the industrial chemicals segment declined by $6.6 million (53%) to $5.9 million in 2002 from $12.5 million in 2001 as a result of the lower pricing, partially offset by
favorable manufacturing efficiencies ($1.8 million) due to lower raw material and energy costs, the impact of the higher volumes and mix ($4.2 million), the favorable effect of the
weaker U.S. dollar ($2.6 million) and lower operating expenses.



Sales for the mineral products business segment were $95.1 million in 2002, a $14.4 million (18%) increase compared with sales of
$80.7 million in 2001, while operating income increased by $7.1 million in 2002 to $20.9 million compared with $13.8 million in 2001. Sales to BMCA increased by
$9.8 million
(15%), while third party sales increased by $4.7 million (27%). The sales growth was predominantly due to higher volumes ($13.1 million) as a result of increased demand for roofing
granules for laminate shingles and an increase in overall market demand. The higher operating income was attributable to the impact of the increased volumes ($3.3 million) and favorable
manufacturing efficiencies ($3.1 million) due to favorable fuel pricing.

Liquidity and Financial Condition



During 2003, our net cash flow before financing activities was $372.2 million, including $213.1 million of cash generated from operations, the
reinvestment of $70.0 million for capital programs and the acquisition of Germinal S.A. (see Note 18 to consolidated financial statements) and $229.1 million of cash generated
from net sales of available-for-sale securities.

Operating Activities.Net cash generated from operating activities totaled $213.1 million for the year 2003, compared
with cash used by operating activities in 2002 of $45.3 million and cash provided by operating activities in 2001 of $264.4 million. The variations in cash flows from operating
activities was mainly attributable to activity related to purchases and sales of trading securities for our investment portfolio. In 2003, there was a cash inflow of $193.9 million from net
sales of trading securities, while in 2002, there was a cash outflow of $255.6 million from net purchases of trading securities and in 2001, there was a cash inflow of $172.6 million
from net sales of trading securities. See "Market-Sensitive Instruments and Risk Management" below for a discussion of our investment strategy.

Cash
from operations for 2003 also included a cash investment of $6.6 million in additional working capital, including an $8.1 million increase in inventories and a
$9.1 million increase in receivables as a result of higher sales, partially offset by a $10.3 million tax refund received by one of our international subsidiaries. Operating activities
also included a $44.6 million cash outflow from related party transactions as the payable of $43.8 million at December 31, 2002 to our parent company was repaid in
February 2003 to fund ISP's going private transaction (see below and Note 17 to consolidated financial statements).

Investing Activities.Net cash provided by investing activities in 2003 totaled $159.1 million, principally
attributable to $229.1 million of cash generated from net sales of available-for-sale securities from our investment portfolio. Capital expenditures in 2003 were
$62.8 million compared with $50.5 million and $53.0 million in 2002 and 2001, respectively.

F-16

---

In
May 2003, we acquired 100% of the stock of Germinal S.A., a supplier of food ingredients to the meat and dairy industry in southern Latin America, for $7.3 million in
cash, net of $0.4 million cash acquired. Germinal has a manufacturing facility at its headquarters in Cabreuva, Brazil. Additional payments of up to $2.7 million may be payable if
certain revenue targets are achieved over the 24 months following the date of acquisition.

Financing Activities.Net cash used in financing activities in 2003 totaled $253.9 million, primarily resulting from a
$125.7 million paydown of short-term borrowings and $126.8 million of loans to related parties. As described in Note 17 to consolidated financial statements, ISP
completed a going private transaction in the first quarter of 2003. The total consideration for the going private transaction of approximately $138.0 million was paid out of our funds. In
addition to our repayment of the $43.8 million intercompany payable to ISP, mentioned above, ISP borrowed a total of $94.0 million from us pursuant to five loan agreements, dated
March 3, 2003, with our wholly owned subsidiary, ISP Investco, and its indirect, wholly owned subsidiary, ISP Ireland. The loans accrue interest at a fixed rate of 1.65% per annum. Three of the
loans, with ISP Ireland, were for principal amounts of up to $20.0 million, $10.0 million and $5.0 million, with maturity dates of six, nine and twelve months, respectively, and
could be extended beyond their maturity dates for periods of time equal to their original terms. The remaining two loans, with ISP Investco, are for amounts up to $30.0 million and
$40.0 million, with maturity dates of three years and can be extended beyond the maturity dates for an equal period of time. The three loans with ISP Ireland were repaid in
December 2003. ISP Investco then entered into a new loan agreement in December 2003 with ISP for an amount of up to $35.0 million. This loan has a term of 10 years and
accrues interest at a fixed rate of 5.12% per annum. The balance of all such loans outstanding at December 31, 2003 aggregated $95.5 million.

In
July 2003, the ISP parent company acquired the synthetic rubber business of Ameripol Synpol Corporation. Effective July 28, 2003, we entered into a promissory note
agreement with ISP Elastomers whereby we may from time to time loan to ISP Elastomers the principal amount of up to $50.0 million. The interest rate on the note is at a rate per annum of 1.65%,
and the note is due and payable on July 28, 2006. The balance of the loan outstanding at December 31, 2003 was $31.2 million.

Financing
activities for the year 2003 also included $2.8 million of repayments of long-term debt and a $1.5 million capital contribution from our parent
company for the termination and payment of stock option plans related to the ISP going private transaction

As
a result of the foregoing factors, cash and cash equivalents increased by $122.6 million during 2003 to $157.6 million. In addition, the consolidated balance sheet
reflects $168.5 million of trading and available-for-sale securities at December 31, 2003.



As of December 31 2003, our current maturities of long-term debt, scheduled to be repaid during 2004, totaled $2.7 million, including
$2.3 million related to the term loan under the Senior Credit Facilities.



During 2001, ISP Chemco Inc., which we refer to as "ISP Chemco," one of our direct, wholly owned subsidiaries, and three of its wholly owned subsidiaries
jointly issued, in three separate transactions, a total of $405 million aggregate principal amount of 101/4% Senior Subordinated Notes

F-17

---

due
2011, which we refer to as the "2011 Notes." The 2011 Notes are guaranteed by substantially all of ISP Chemco's domestic subsidiaries. The 2011 Notes were issued under an indenture which, among
other things, places limitations on the ability of ISP Chemco and its subsidiaries, except our accounts receivable subsidiary and certain immaterial subsidiaries, to incur additional debt, issue
preferred stock, incur liens, and pay dividends or make certain other restricted payments and restricted investments.

In
June 2001, in a related transaction, ISP Chemco and those same three subsidiaries which issued the 2011 Notes also entered into $450.0 million of new senior secured
credit facilities, which we refer to as the "Senior Credit Facilities." The Senior Credit Facilities are comprised of a $225.0 million term loan with a maturity of seven years and a
$225.0 million revolving credit facility which will terminate in June 2006. The revolving credit facility includes a borrowing capacity not in excess of $50.0 million for letters
of credit. As of December 31, 2003, no borrowings and $9.8 million of letters of credit were outstanding under the revolving credit facility. All borrowings under the Senior Credit
Facilities are based on either an alternate base rate (based on the banks' base rate or on the federal funds rate) or on the Eurodollar rate plus a margin based on the ratio of ISP Chemco's total
consolidated debt to EBITDA (as defined in the Senior Credit Facilities). The average interest rate at December 31, 2003 on borrowings under the Senior Credit Facilities was 4.2%. The Senior
Credit Facilities require compliance with various financial covenants, including a total debt leverage maintenance ratio, a senior debt leverage maintenance ratio, an interest coverage ratio and a
minimum adjusted net worth. In addition,
the Senior Credit Facilities limit the ability of ISP Chemco and its subsidiaries, except its accounts receivable subsidiary and certain immaterial subsidiaries, to incur additional debt, issue
preferred stock, incur liens, and pay dividends or make certain other restricted payments and restricted investments. ISP Chemco and substantially all of its domestic subsidiaries are designated as
obligors under the Senior Credit Facilities. The obligations of the obligors under the Senior Credit Facilities are secured by a first-priority security interest in 100% of the capital stock of ISP
Chemco's domestic subsidiaries and 66% of the capital stock of some of ISP Chemco's foreign subsidiaries, and substantially all of the real and personal property of the obligors, except for our
accounts receivable subsidiary and certain immaterial subsidiaries.

On
December 13, 2001, we issued $200.0 million principal amount of 105/8% Senior Secured Notes due 2009, which we refer to as the "2009 Notes." The 2009
Notes are secured by a first priority lien on all of the outstanding capital stock of ISP Chemco. The 2009 Notes are structurally subordinated to all liabilities of our subsidiaries. The 2009 Notes
were issued under an indenture which, among other things, limits our ability and the ability of our subsidiaries, except our unrestricted subsidiaries, to incur additional debt, enter into
transactions with affiliates, issue preferred stock, incur liens, and pay dividends or make certain other restricted payments and restricted investments. ISP Investco LLC, one of our wholly owned
subsidiaries, the subsidiaries of ISP Investco, our accounts receivable subsidiary and certain immaterial subsidiaries have been designated as unrestricted subsidiaries under the indenture related to
the 2009 Notes.

The
borrowings of certain of our subsidiaries are subject to the application of certain financial covenants contained in the Senior Credit Facilities and in the indenture governing the
2011 Notes. Our borrowings are also subject to the application of some financial covenants contained in the indenture governing the 2009 Notes. As of December 31, 2003, we and those
subsidiaries were in compliance with those covenants, and the application of those covenants would not have restricted available borrowings under the Senior Credit Facilities. See Note 14 to
consolidated financial statements.

F-18

---

The
Senior Credit Facilities and the indenture governing the 2011 Notes contain additional affirmative and negative covenants affecting ISP Chemco and some of its subsidiaries, including
restrictions on transactions with affiliates, sale-leaseback transactions, and mergers and transfers of all or substantially all of those subsidiaries' assets. The indenture governing the
2009 Notes also contains additional affirmative and negative covenants similar to those contained in the indenture governing the 2011 Notes affecting us and some of our subsidiaries. These limitations
do not apply to ISP Investco LLC, an unrestricted subsidiary. As of December 31, 2003, under the most restrictive of these limitations, we could have paid restricted payments of up to
$48.6 million. See Note 14 to consolidated financial statements. Restricted payments are dividends, acquisitions of our equity or other capital stock, payments on subordinated debt or
most investments in third parties. Despite those limitations, we expect our availability under those covenants to make restricted payments, tax sharing payments and other permitted cash payments will
allow us to satisfy our cash obligations under the notes. Additionally, in the event the holders of the 2009 Notes were to foreclose on ISP Chemco's capital stock following an event of default under
those notes, the sale of the capital stock would constitute a change of control of ISP Chemco. Under the indenture governing the 2011 Notes, if a change of
control of ISP Chemco occurs, ISP Chemco is obligated to make an offer to repurchase the 2011 Notes from their respective holders. The terms of the Senior Credit Facilities, however, prohibit the
repayment of the 2011 Notes in that event unless and until such time as the indebtedness under the Senior Credit Facilities is repaid in full. Failure to make such repayment upon a change of control
would result in a default under the 2011 Notes. A change of control of ISP Chemco would also result in a default under the Senior Credit Facilities. In the event of a default under the indenture
governing the 2011 Notes or under the Senior Credit Facilities, the holders of the 2011 Notes or the lenders under the Senior Credit Facilities, as the case may be, could elect to accelerate the
maturity of the 2011 Notes or the loans under the Senior Credit Facilities. Those events could have a material adverse effect on our financial condition and results of operations.

Subject
to restrictions in our Senior Credit Facilities and the indentures governing the 2009 and 2011 Notes, our subsidiaries may incur additional debt for working capital, capital
expenditures, acquisitions and other purposes.



Our commercial commitments as of December 31, 2003 are as follows:

|                          |                           | Amount of Commitment Per Period
|------------------------- | ------------------------- | -------------------------------
|
|
|Senior Credit Facilities: |                           |                                
|                          | Term loan                 |                                
|                          | Revolving credit facility |                                
|                          | Standby letters of credit |                                
|Lines of credit           |                           |                                

The
Senior Credit Facilities are comprised of a $225.0 million term loan maturing in 2008 and a $225.0 million revolving credit facility which will terminate in
June 2006. The revolving credit facility includes a borrowing capacity not in excess of $50.0 million for letters of credit.

F-19

---



Capital expenditures are expected to be approximately $75.0 million in 2004.



For information with respect to income taxes, see Note 8 to consolidated financial statements.



Inflation generally affects our company by increasing the cost of labor, raw materials and energy costs. We do not believe that inflation has had a significant
adverse effect on our results of operations during the past three years. However, there can be no assurance that our business will not be affected by inflation in the future.



We entered into an operating lease in 1998 for an equipment sale-leaseback transaction related to equipment at our Freetown, Massachusetts facility.
The lease had an initial term of four years and, at our option, up to three one-year renewal periods. The first two annual renewal options were exercised during 2002 and 2003, and the
third and final renewal option will be exercised during 2004. The lease provides for a substantial guaranteed payment by us, adjusted at the end of each renewal period, and includes purchase and
return options at fair market values determined at the inception of the lease. We have the right to exercise a purchase option with respect to the leased equipment, or the equipment can be returned to
the lessor and sold to a third party. If we do not exercise the purchase option in 2005, we will then be obligated to pay a maximum guaranteed payment amount upon the return of the equipment,
currently $32.6 million, reduced by 50% of any proceeds from the subsequent sale of the equipment in excess of $4.8 million. This amount of $32.6 million is included in the table
below of "Contractual Obligations" within the caption "Operating leases." In December 2003, we received $1.1 million in settlement of amounts due from the Polaroid bankruptcy (see
below). In accordance with the Freetown lease agreement, we paid this $1.1 million to the lessor as a prepayment against future rental obligations under the lease.

As
part of our acquisition of the Freetown facility in 1998, we entered into a multi-year agreement to supply the imaging dyes and polymers used by Polaroid in its instant
film business. In October 2001, Polaroid filed for protection under Chapter 11 of the U.S. Bankruptcy Code. In the third quarter of 2002, the majority of Polaroid's assets were acquired by a
new owner, and the new owner did not assume our long-term supply contract with Polaroid. These events negatively impacted the sale of our fine chemicals products and reduced the
utilization of our Freetown plant. We have since increased the utilization of the Freetown facility, primarily from additional production of personal care products. We also continue to shift specialty
chemicals production to our Columbus, Ohio fine chemicals facility, which currently has excess capacity.



We, together with other companies, are a party to a variety of proceedings and lawsuits involving environmental matters. See Note 21 to consolidated
financial statements and Item 3, "Legal Proceedings" for further information.

F-20

---



INTERNATIONAL SPECIALTY HOLDINGS INC.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS (Continued)



We have a contract with a multinational supplier to supply a substantial amount of our acetylene needs to our Texas City, Texas facility. As a result of the
expiration of this contract in March 2004, we have taken the following actions. We have reduced our acetylene requirements at the Texas City plant by 50% through shifting production of
acetylene-consuming products to our Calvert City, Kentucky plant. We have also entered into a long-term supply contract for the remaining Texas City plant requirements with a local
producer. Under this contract, we are obligated to purchase specified quantities of acetylene through the end of 2013. Pricing under this contract is on a fixed basis with escalators related to
changes in the Producer Price Index.

We
also have an acetylene supply contract for our requirements of acetylene delivery via pipeline to our Calvert City facility. The current term of this contract expires
December 31, 2009 and allows us, at our sole option, to extend the agreement for two additional terms of five years each. We are required by the contract to pay a monthly
non-cancelable facility fee. Pricing under the contract is on a fixed basis with escalators related to changes in the Producer Price Index.

The
annual unconditional purchase obligation related to the long-term acetylene supply contract at the Texas City plant, together with the non-cancelable facility
fee associated with the Calvert City plant acetylene contract is $5.1 million and is included in the table of contractual obligations shown below, together with other contractual obligations
related to debt and leases.

|                                   |  | Payments Due by Period
|---------------------------------- |  | ----------------------
|
|
|Long-term debt                     |  | $                     
|Unconditional purchase obligations |  |                       
|Operating leases                   |  |                       
|Capital lease obligations          |  |                       

In
May 2003, we entered into a long-term contract with BMCA to supply BMCA and its subsidiaries substantially all of their colored roofing granules and algae-resistant
granules requirements, except for the requirements of certain of their roofing plants that are supplied by third parties. The contract includes pricing discounts based on volume purchase targets,
which, if the highest discount levels are reached over the term of the contract, could adversely impact gross margins for the mineral products segment.



Our investment strategy is to seek returns in excess of money market rates on our available cash while minimizing market risks. There can be no assurance that we
will be successful in implementing such a strategy. We invest primarily in international and domestic securities of companies involved in acquisition or reorganization transactions. When the terms of
a proposed acquisition provide for the target's shareholders to receive stock or other securities of the acquirer, we generally employ hedging strategies to protect against a decline in the value of
such securities prior to the completion of the acquisition. One such strategy is to sell short a pre-determined amount of the acquirer's stock at the same time a long position is
established in the target's shares. We will cover our short position with the

F-21

---

acquirer's
stock received. This strategy will lock in a profit equal to the initial deal spread at the time we employed this hedging strategy. From time to time, we also invest in securities of
companies that we consider to be undervalued. With respect to our equity positions, we are exposed to the risk of market loss. See Notes 2 and 5 to consolidated financial statements.

|                                       |  | December 31, 2002 |      | December 31, 2003
|-------------------------------------- |  | ----------------- | ---- | -----------------
|
|
|Interest rate financial instruments    |  | $                 |     |                  
|Foreign currency financial instruments |  |                   | 10.0 |                  
|Equity-related financial instruments   |  |                   | 4.4  |                  

All
of the financial instruments in the above table have a maturity of less than one year.

We
enter into forward foreign exchange instruments in order to hedge a portion of both our borrowings denominated in foreign currency and transactions related to the operations of our
foreign subsidiaries. Forward contract agreements require us 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.

As
of December 31, 2002, the U.S. dollar equivalent notional value of outstanding forward foreign exchange contracts was $10.0 million. There were no outstanding forward
foreign exchange contracts as of December 31, 2003. All foreign exchange contracts outstanding as of December 31, 2002 were entered into as a hedge of intercompany loans, representing
100% of our foreign currency exposure with respect to such loans.

We
enter into equity-related financial instruments, including total return equity swaps and interest rate swaps, as a means to manage our exposure to market fluctuations on our
short-term investments and to achieve our stated investment strategy. These contracts are subject to strict internal controls, including maximum exposure levels and counterparty risk. The
counterparties to these contracts are major financial institutions with high credit standings. We control risk through credit approvals, limits and monitoring procedures. We do not anticipate
nonperformance by counterparties to these contracts. We have exposure to equity price risk as a result of our investment in equity securities and equity derivatives. Equity price risk results from
changes in the level or volatility of equity prices which affect the value of equity securities or instruments that derive their value from such securities or indexes.

As
of December 31, 2002 and 2003, the notional value of equity-related long contracts was $4.0 and $282.1 million, respectively, and the notional value of equity-related
short contracts was $0.4 and $201.7 million, respectively. The notional value of interest rate swaps at December 31, 2003 was $23.0 million. These contracts are
marked-to-market each month, with unrealized gains and losses included in the results of operations. The unrealized gains (losses) on equity-related long contracts at
December 31, 2002 and 2003 were $(145,000) and $35.6 million, respectively, and the unrealized gains on equity-related short contracts were $6,000 and $1.5 million, respectively.
The unrealized gain on interest rate swaps at December 31, 2003 was $48,000.

In
1998, the Financial Accounting Standards Board, which we refer to as "FASB," issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by
SFAS

F-22

---

No. 138.
SFAS No. 133 and SFAS No. 138 established 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 and SFAS No. 138 require that changes in a derivative's fair value be recognized currently in earnings unless specific hedge
accounting criteria are met, which for qualifying hedges, allow a derivative's gains and losses to offset related results on the hedged item in the statement of operations.

We
adopted SFAS No. 133 and SFAS No. 138 as of January 1, 2001. Accounting for interest rate swaps and foreign exchange forward contracts held by us was affected by
implementation of these standards. The earnings impact of the transition adjustments related to the initial adoption of the standards was an after-tax loss of $0.4 million, which
was recorded in the first quarter of 2001 as the cumulative effect of a change in accounting principle.

The
Senior Credit Facilities include a $225.0 million term loan. In 2001, we designated interest rate swaps, with a total notional amount of $100 million, as a hedge of our
exposure to changes in the Eurodollar rate under the term loan. The interest rate swaps were structured to receive interest based on the Eurodollar rate and pay interest on a fixed rate basis. The
interest rate swaps were designated to have a cash flow hedging relationship whereby the interest rate swaps hedged the risk of changes in the Eurodollar rate related to borrowings against the term
loan through July 2002. The interest rate swaps were deemed to be highly effective throughout the term of their designation as a cash flow hedge. Those swaps matured in June and July of 2002.
During 2002, $1.5 million related to the interest rate swaps was reclassified and charged against interest expense.



In November 2002, the FASB issued FASB Interpretation No. 45, which we refer to as "FIN 45," "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 clarifies the requirements for a guarantor's accounting for and disclosures of certain guarantees
issued and outstanding. The provisions of FIN 45 apply to guarantee contracts that contingently require the guarantor to make payments (in cash, financial instruments, other assets, shares of
stock or provision of services) to the guaranteed party for guarantees such as a financial standby letter of credit, a market value guarantee on either a financial or nonfinancial asset owned by the
guaranteed party and a guarantee of the collection of the scheduled contractual cash flows from financial assets held by a special-purpose entity. FIN 45 also applies to indemnification
contracts and indirect guarantees of indebtedness of others. The requirements of FIN 45 for the initial recognition and measurement of the liability for a guarantor's obligations are to be
applied only on a
prospective basis to guarantees issued or modified after December 31, 2002. A subsidiary's guarantee of the debt of its parent (as disclosed in Note 14 to consolidated financial
statements) is not subject to the initial recognition and measurement provisions of FIN 45 but are subject to its disclosure requirements. We currently do not have any guarantees,
indemnification contracts or indirect guarantees of indebtedness of others that would be subject to the initial recognition and measurement provisions of FIN 45. As discussed in Note 14
to consolidated financial statements, ISP Chemco's 101/4% Senior Subordinated Notes due 2011 are guaranteed by all of ISP Chemco's domestic subsidiaries, other than certain immaterial
subsidiaries and our accounts receivable financing subsidiary.

In
April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies
financial accounting and reporting for derivative instruments and hedging activities under SFAS No. 133. SFAS No. 149 is

F-23

---

effective
for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 has not had an
immediate impact on our consolidated financial statements.

In
December 2003, the FASB issued a revised FIN 46, "Consolidation of Variable Interest Entities," which had originally been issued in January 2003. In accordance
with FIN 46, a variable interest entity will be consolidated if either the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional
subordinated financial support from other parties, or as a group, the holders of the equity investment at risk lack any one of the following three characteristics of a controlling financial interest:
(1) the direct or indirect ability to make decisions about an entity's activities; (2) the obligation to absorb the expected losses of the entity if they occur; (3) the right to
receive the expected residual returns of the entity if they occur. All companies with variable interests in variable interest entities subject to FIN 46 shall apply the provisions of
FIN 46 no later than the end of the first reporting period that ends after March 15, 2004. Our company does not currently have an interest in a variable interest entity. Therefore,
FIN 46 will not have an immediate impact on our consolidated financial statements.

* * *

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 our objectives, plans or goals also are forward-looking statements.
Our 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 we undertake 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-24

---



INTERNATIONAL SPECIALTY HOLDINGS INC.        SELECTED FINANCIAL DATA

Set forth below are selected consolidated financial data. We were formed on June 5, 2001, and the financial data presented below have been prepared on a
basis which retroactively reflects our formation for all periods presented.

|                    |                                                                                                                 | Year Ended December 31,
|------------------- | --------------------------------------------------------------------------------------------------------------- | -----------------------
|
|
|Operating Data:     |                                                                                                                 |                        
|                    | Net sales                                                                                                       |                        
|                    | Operating income                                                                                                |                        
|                    | Interest expense                                                                                                |                        
|                    | Income from continuing operations before income taxes and cumulative effect of changes in accounting principles |                        
|                    | Income from continuing operations before cumulative effect of changes in accounting principles                  |                        
|                    | Net income (loss)                                                                                               |                        
|Other Data:         |                                                                                                                 |                        
|                    | Depreciation                                                                                                    |                        
|                    | Amortization of goodwill and intangible assets                                                                  |                        
|                    | Capital expenditures and acquisitions                                                                           |                        
|                    |                                                                                                                 |                        
|
|
|
|Balance Sheet Data: |                                                                                                                 |                        
|                    | Total working capital                                                                                           |                        
|                    | Total assets                                                                                                    |                        
|                    | Long-term debt less current maturities                                                                          |                        
|                    | Shareholder's equity                                                                                            |                        

F-25

---



INDEPENDENT AUDITORS' REPORT

To
the Board of Directors of International Specialty Holdings Inc.:

We
have audited the accompanying consolidated balance sheets of International Specialty Holdings Inc. and subsidiaries as of December 31, 2002 and 2003, and the related consolidated
statements of operations, shareholder's equity, and cash flows for the years then ended. In connection with our audit of the 2002 and 2003 consolidated financial statements, we also have audited the
2002 and 2003 consolidated financial statement schedule on page S-1. These consolidated financial statements and consolidated financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement schedule based on our audits. The 2001 consolidated financial
statements of International Specialty Holdings Inc. and subsidiaries were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those
consolidated financial statements and consolidated financial statement schedule, before the revision described in Note 12 and before the restatement described in Note 19 to the
consolidated financial statements, in their report dated February 27, 2002.

We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 2002 and 2003 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of International Specialty
Holdings Inc. and subsidiaries as of December 31, 2002 and 2003, and the results of their operations and their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America. Also in our opinion, the related 2002 and 2003 consolidated financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As
discussed in Notes 12 and 15 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142,Goodwill and Other
Intangible Assets, as of January 1, 2002, and Statement of Financial Accounting Standards No. 143,Accounting for Asset Retirement
Obligations, as of January 1, 2003, respectively.

As
discussed above, the 2001 consolidated financial statements of International Specialty Holdings Inc. and subsidiaries were audited by other auditors who have ceased operations. As described
in Note 12, these consolidated financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets, which was adopted by the Company as of January 1, 2002. As described in Note 19, the Company changed
the composition of its reportable segments in 2003, and the amounts in the 2001 consolidated financial statements relating to reportable segments have been restated to conform to the 2003 composition
of reportable segments. We audited the adjustments that were applied to restate the disclosures for reportable segments reflected in the 2001 consolidated financial statements. In our opinion, such
transitional disclosures for 2001 in Note 12 are appropriate and such segment adjustments in Note 19 are appropriate and have been properly applied. However, we were not engaged to
audit, review, or apply any procedures to the 2001 consolidated financial statements of International Specialty Holdings Inc. and subsidiaries other than with respect to such transitional
disclosures and such segment adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2001 consolidated financial statements taken as a whole.

KPMG
LLP

Short
Hills, New Jersey
February 17, 2004

F-26

---



INFORMATION REGARDING PREDECESSOR INDEPENDENT PUBLIC ACCOUNTANTS' REPORT

The following report is a copy of a previously issued report by Arthur Andersen LLP ("Andersen"). The report has not been reissued by Andersen nor has Andersen
consented to its inclusion in this annual report on Form 10-K. The 2001 financial statements have been revised to include transitional disclosures to reflect the effects of the
Company's adoption of Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assetsand have been restated to conform
to the 2003 composition of reportable segments. The Andersen report refers to the consolidated balance sheets as of December 31, 2000 and 2001 and the consolidated statements of income,
shareholder's equity and cash flows for the years ended December 31, 1999 and 2000, which are no longer included in the accompanying financial statements. The Andersen report refers to page
numbers in the Company's Form S-4 Registration Statement No. 333-82822.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To
International Specialty Holdings Inc.:

We
have audited the accompanying consolidated balance sheets of International Specialty Holdings Inc. (a Delaware corporation) and subsidiaries as of December 31, 2000 and
2001, and the related consolidated statements of income, shareholder's equity and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States. 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-3 to F-41 of this Prospectus, present fairly, in all material respects, the
financial position of International Specialty Holdings Inc. and subsidiaries as of December 31, 2000 and 2001, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

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 Prospectus 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 27, 2002

F-27

---



INTERNATIONAL SPECIALTY HOLDINGS INC.    CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                                                                  |  | Year Ended December 31, |         
|----------------------------------------------------------------------------------------------------------------- |  | ----------------------- | --------
|
|
|Net sales                                                                                                         |  | $                       | 787,216 
|Cost of products sold                                                                                             |  |                         | (500,837
|Selling, general and administrative                                                                               |  |                         | (158,132
|Other operating gains and (charges), net                                                                          |  |                         | 2,071   
|Amortization of goodwill and intangible assets                                                                    |  |                         | (17,080 
|                                                                                                                  |  |                         |         
|Operating income                                                                                                  |  |                         | 113,238 
|Interest expense                                                                                                  |  |                         | (88,931 
|Investment income (loss), net                                                                                     |  |                         | (2,461  
|Charge for early retirement of debt                                                                               |  |                         |        
|Other expense, net                                                                                                |  |                         | (16,061 
|                                                                                                                  |  |                         |         
|Income before income taxes and cumulative effect of changes in accounting principles                              |  |                         | 5,785   
|Income taxes                                                                                                      |  |                         | (2,053  
|                                                                                                                  |  |                         |         
|Income before cumulative effect of changes in accounting principles                                               |  |                         | 3,732   
|Cumulative effect of changes in accounting principles, net of income tax benefit of $216 in 2001 and $600 in 2003 |  |                         | (440    
|                                                                                                                  |  |                         |         
|Net income (loss)                                                                                                 |  | $                       | 3,292   
|                                                                                                                  |  |                         |         

The
accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

F-28

---



INTERNATIONAL SPECIALTY HOLDINGS INC.    CONSOLIDATED BALANCE SHEETS

|                                                                                                                  |                                                                                                             | December 31,               |          
|----------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | -------------------------- | ---------
|
|
|ASSETS                                                                                                            |                                                                                                             |                            |          
|Current Assets:                                                                                                   |                                                                                                             |                            |          
|                                                                                                                  | Cash and cash equivalents                                                                                   |                            | $        
|                                                                                                                  | Investments in trading securities                                                                           |                            |          
|                                                                                                                  | Investments in available-for-sale securities                                                                |                            |          
|                                                                                                                  | Accounts receivable, trade, less allowance of $6,022 and $5,848 at December 31, 2002 and 2003, respectively |                            |          
|                                                                                                                  | Accounts receivable, other                                                                                  |                            |          
|                                                                                                                  | Receivables from related parties                                                                            |                            |          
|                                                                                                                  | Inventories                                                                                                 |                            |          
|                                                                                                                  | Deferred income tax assets                                                                                  |                            |          
|                                                                                                                  | Prepaid expenses                                                                                            |                            |          
|                                                                                                                  |                                                                                                             |                            |          
|                                                                                                                  |                                                                                                             | Total Current Assets       |          
|Property, plant and equipment, net                                                                                |                                                                                                             |                            | 565,713  
|Goodwill, net of accumulated amortization of $180,486                                                             |                                                                                                             |                            | 325,706  
|Intangible assets, net of accumulated amortization of $575 and $1,050 at December 31, 2002 and 2003, respectively |                                                                                                             |                            | 9,442    
|Long-term loans receivable from related parties                                                                   |                                                                                                             |                            |         
|Other assets                                                                                                      |                                                                                                             |                            | 55,079   
|                                                                                                                  |                                                                                                             |                            |          
|Total Assets                                                                                                      |                                                                                                             | $                          | 1,849,347
|                                                                                                                  |                                                                                                             |                            |          
|LIABILITIES AND SHAREHOLDER'S EQUITY                                                                              |                                                                                                             |                            |          
|Current Liabilities:                                                                                              |                                                                                                             |                            |          
|                                                                                                                  | Short-term debt                                                                                             |                            | $        
|                                                                                                                  | Current maturities of long-term debt                                                                        |                            |          
|                                                                                                                  | Accounts payable                                                                                            |                            |          
|                                                                                                                  | Accrued liabilities                                                                                         |                            |          
|                                                                                                                  | Payable to parent company                                                                                   |                            |          
|                                                                                                                  | Income taxes payable                                                                                        |                            |          
|                                                                                                                  |                                                                                                             |                            |          
|                                                                                                                  |                                                                                                             | Total Current Liabilities  |          
|                                                                                                                  |                                                                                                             |                            |          
|Long-term debt less current maturities                                                                            |                                                                                                             |                            | 823,008  
|                                                                                                                  |                                                                                                             |                            |          
|Deferred income taxes                                                                                             |                                                                                                             |                            | 70,678   
|                                                                                                                  |                                                                                                             |                            |          
|Other liabilities                                                                                                 |                                                                                                             |                            | 110,761  
|                                                                                                                  |                                                                                                             |                            |          
|Commitments and Contingencies                                                                                     |                                                                                                             |                            |          
|Shareholder's Equity:                                                                                             |                                                                                                             |                            |          
|                                                                                                                  | Common stock, $.001 par value per share; 100 shares issued and outstanding                                  |                            |          
|                                                                                                                  | Additional paid-in capital                                                                                  |                            |          
|                                                                                                                  | Accumulated deficit                                                                                         |                            |          
|                                                                                                                  | Accumulated other comprehensive income (loss)                                                               |                            |          
|                                                                                                                  |                                                                                                             |                            |          
|                                                                                                                  |                                                                                                             | Total Shareholder's Equity |          
|                                                                                                                  |                                                                                                             |                            |          
|Total Liabilities and Shareholder's Equity                                                                        |                                                                                                             | $                          | 1,849,347
|                                                                                                                  |                                                                                                             |                            |          

The
accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

F-29

---



INTERNATIONAL SPECIALTY HOLDINGS INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                  |                                                                                                    | Year Ended December 31,                                                  |         
|----------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | --------
|
|
|Cash flows from operating activities:                             |                                                                                                    |                                                                          |         
|                                                                  | Net income (loss)                                                                                  |                                                                          | $       
|                                                                  | Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities: |                                                                          |         
|                                                                  |                                                                                                    | Cumulative effect of changes in accounting principles                    |         
|                                                                  |                                                                                                    | Gain on sale of assets                                                   |         
|                                                                  |                                                                                                    | Write-off of deferred costs and fixed assets                             |         
|                                                                  |                                                                                                    | Depreciation                                                             |         
|                                                                  |                                                                                                    | Amortization of goodwill and intangible assets                           |         
|                                                                  |                                                                                                    | Deferred income taxes                                                    |         
|                                                                  |                                                                                                    | Unrealized (gains) losses on securities and other short-term investments |         
|                                                                  | (Increase) decrease in working capital items                                                       |                                                                          |         
|                                                                  | Purchases of trading securities                                                                    |                                                                          |         
|                                                                  | Proceeds from sales of trading securities                                                          |                                                                          |         
|                                                                  | Proceeds (repayments) from sale of accounts receivable                                             |                                                                          |         
|                                                                  | (Increase) decrease in other assets                                                                |                                                                          |         
|                                                                  | Increase (decrease) in other liabilities                                                           |                                                                          |         
|                                                                  | Change in receivable from/payable to related parties                                               |                                                                          |         
|                                                                  | Other, net                                                                                         |                                                                          |         
|                                                                  |                                                                                                    |                                                                          |         
|Net cash provided by (used in) operating activities               |                                                                                                    |                                                                          | 264,358 
|                                                                  |                                                                                                    |                                                                          |         
|Cash flows from investing activities:                             |                                                                                                    |                                                                          |         
|                                                                  | Capital expenditures and acquisitions                                                              |                                                                          |         
|                                                                  | Proceeds from sale of assets                                                                       |                                                                          |         
|                                                                  | Purchases of available-for-sale securities                                                         |                                                                          |         
|                                                                  | Proceeds from sales of available-for-sale securities                                               |                                                                          |         
|                                                                  | Proceeds from sales of other short-term investments                                                |                                                                          |         
|                                                                  |                                                                                                    |                                                                          |         
|Net cash provided by (used in) investing activities               |                                                                                                    |                                                                          | (187,889
|                                                                  |                                                                                                    |                                                                          |         
|Cash flows from financing activities:                             |                                                                                                    |                                                                          |         
|                                                                  | Increase (decrease) in short-term debt                                                             |                                                                          |         
|                                                                  | Proceeds from issuance of debt                                                                     |                                                                          |         
|                                                                  | Decrease in borrowings under revolving credit facility                                             |                                                                          |         
|                                                                  | Repayments of long-term debt                                                                       |                                                                          |         
|                                                                  | Call premium on redemption of debt                                                                 |                                                                          |         
|                                                                  | Loans to related parties                                                                           |                                                                          |         
|                                                                  | Repayment of loan from parent company                                                              |                                                                          |         
|                                                                  | (Increase) decrease in restricted cash                                                             |                                                                          |         
|                                                                  | Debt issuance costs                                                                                |                                                                          |         
|                                                                  | Dividends and distributions to parent company                                                      |                                                                          |         
|                                                                  | Capital contribution from parent company                                                           |                                                                          |         
|                                                                  |                                                                                                    |                                                                          |         
|Net cash provided by (used in) financing activities               |                                                                                                    |                                                                          | (12,873 
|                                                                  |                                                                                                    |                                                                          |         
|Effect of exchange rate fluctuations on cash and cash equivalents |                                                                                                    |                                                                          | (496    
|                                                                  |                                                                                                    |                                                                          |         
|Net change in cash and cash equivalents                           |                                                                                                    |                                                                          | 63,100  
|Cash and cash equivalents, beginning of year                      |                                                                                                    |                                                                          | 14,763  
|                                                                  |                                                                                                    |                                                                          |         
|Cash and cash equivalents, end of year                            |                                                                                                    | $                                                                        | 77,863  
|                                                                  |                                                                                                    |                                                                          |         

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

F-30

---



|                                                                   |                                                                                | Year Ended December 31,                                              |  
|------------------------------------------------------------------ | ------------------------------------------------------------------------------ | -------------------------------------------------------------------- | -
|
|
|Supplemental Cash Flow Information:                                |                                                                                |                                                                      |  
|Effect on cash from (increase) decrease in working capital items*: |                                                                                |                                                                      |  
|                                                                   | Accounts receivable                                                            |                                                                      | $
|                                                                   | Inventories                                                                    |                                                                      |  
|                                                                   | Deferred income tax assets                                                     |                                                                      |  
|                                                                   | Prepaid expenses                                                               |                                                                      |  
|                                                                   | Accounts payable                                                               |                                                                      |  
|                                                                   | Accrued liabilities                                                            |                                                                      |  
|                                                                   | Income taxes                                                                   |                                                                      |  
|                                                                   |                                                                                |                                                                      |  
|                                                                   |                                                                                | Net effect on cash from (increase) decrease in working capital items |  
|                                                                   |                                                                                |                                                                      |  
|Cash paid during the period for:                                   |                                                                                |                                                                      |  
|                                                                   | Interest (net of amount capitalized)                                           |                                                                      | $
|                                                                   | Income taxes paid (including taxes paid pursuant to the Tax Sharing Agreement) |                                                                      |  
|Acquisition of FineTech Ltd.:                                      |                                                                                |                                                                      |  
|                                                                   | Fair market value of assets acquired                                           |                                                                      | $
|                                                                   | Purchase price of acquisition                                                  |                                                                      |  
|                                                                   |                                                                                |                                                                      |  
|                                                                   | Liabilities assumed                                                            |                                                                      | $
|                                                                   |                                                                                |                                                                      |  
|Acquisition of industrial biocides business:                       |                                                                                |                                                                      |  
|                                                                   | Fair market value of assets acquired                                           |                                                                      | $
|                                                                   | Purchase price of acquisition                                                  |                                                                      |  
|                                                                   |                                                                                |                                                                      |  
|                                                                   | Liabilities assumed                                                            |                                                                      | $
|                                                                   |                                                                                |                                                                      |  
|Acquisition of mineral products facility:                          |                                                                                |                                                                      |  
|                                                                   | Fair market value of assets acquired                                           |                                                                      |  
|                                                                   | Purchase price of acquisition                                                  |                                                                      |  
|                                                                   |                                                                                |                                                                      |  
|                                                                   | Liabilities assumed                                                            |                                                                      |  
|                                                                   |                                                                                |                                                                      |  
|Acquisition of Germinal S.A., net of $436 cash acquired:           |                                                                                |                                                                      |  
|                                                                   | Fair market value of assets acquired                                           |                                                                      |  
|                                                                   | Purchase price of acquisition                                                  |                                                                      |  
|                                                                   |                                                                                |                                                                      |  
|                                                                   | Liabilities assumed                                                            |                                                                      |  
|                                                                   |                                                                                |                                                                      |  

---

The
accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

F-31

---



INTERNATIONAL SPECIALTY HOLDINGS INC.        CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY

|                           |                                                                | Common Stock
and Additional
Paid-In Capital                                                              |         | Accumulated
Other
Comprehensive
Income (Loss) |   | Accumulated
Deficit |   | Comprehensive
Income (Loss) |         
|-------------------------- | -------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------- | ------- | --------------------------------------------- | - | ------------------- | - | --------------------------- | --------
|
|Balance, December 31, 2000 |                                                                | $                                                                                                        | 568,912 |                                               | $ | 12,001              |   | $                           |        
|                           | Comprehensive income (loss), year ended December 31, 2001:     |                                                                                                          |         |                                               |   |                     |   |                             |         
|                           |                                                                | Net income                                                                                               |         |                                               |  |                     |   |                            |         
|                           |                                                                |                                                                                                          |         |                                               |   |                     |   |                             |         
|                           |                                                                | Other comprehensive losses, net of tax:                                                                  |         |                                               |   |                     |   |                             |         
|                           |                                                                | Unrealized holding losses, net of income tax benefit of $43,630                                          |         |                                               |  |                     |   | (81,534                     | )       
|                           |                                                                | Less: Reclassification adjustment for losses included in net income, net of income tax benefit of $7,687 |         |                                               |  |                     |   | (15,071                     | )       
|                           |                                                                |                                                                                                          |         |                                               |   |                     |   |                             |         
|                           |                                                                | Change in unrealized losses on available-for-sale securities                                             |         |                                               |  |                     |   | (66,463                     | )       
|                           |                                                                |                                                                                                          |         |                                               |   |                     |   |                             |         
|                           |                                                                | Change in unrealized losses on derivative hedging instrumentscash flow hedges:                          |         |                                               |   |                     |   |                             |         
|                           |                                                                | Net derivative losses, net of tax effect of $1,189                                                       |         |                                               |  |                     |   | (2,198                      | )       
|                           |                                                                | Less: Reclassification adjustment for losses included in net income, net of tax effect of $667           |         |                                               |  |                     |   | (1,234                      | )       
|                           |                                                                |                                                                                                          |         |                                               |   |                     |   |                             |         
|                           |                                                                | Unrealized losses on derivative hedging instruments                                                      |         |                                               |  |                     |   | (964                        | )       
|                           |                                                                |                                                                                                          |         |                                               |   |                     |   |                             |         
|                           |                                                                | Translation adjustment                                                                                   |         |                                               |  |                     |   | (5,676                      | )       
|                           |                                                                |                                                                                                          |         |                                               |   |                     |   |                             |         
|                           | Comprehensive loss                                             |                                                                                                          |         |                                               |   |                     |   |                             |         
|                           |                                                                |                                                                                                          |         |                                               |   |                     |   |                             |         
|                           | Dividends and distributions to parent company                  |                                                                                                          |         | (9,057                                        | ) |                     |  |                             |         
|                           | Capital contribution from parent company                       |                                                                                                          |         | 86,317                                        |   |                     |  |                             |         
|                           | Compensation related to ISP restricted stock awards            |                                                                                                          |         | 66                                            |   |                     |  |                             |         
|                           | Compensation related to ISP stock options issued as incentives |                                                                                                          |         | 104                                           |   |                     |  |                             |         
|                           |                                                                |                                                                                                          |         |                                               |   |                     |   |                             |         
|Balance, December 31, 2001 |                                                                | $                                                                                                        | 646,342 |                                               | $ | (61,102             | ) | $                           | (22,651 
|                           | Comprehensive income (loss), year ended December 31, 2002:     |                                                                                                          |         |                                               |   |                     |   |                             |         
|                           |                                                                | Net loss                                                                                                 |         |                                               |  |                     |   |                            |         
|                           |                                                                |                                                                                                          |         |                                               |   |                     |   |                             |         
|                           |                                                                | Other comprehensive income (loss), net of tax:                                                           |         |                                               |   |                     |   |                             |         
|                           |                                                                | Unrealized holding gains, net of income taxes of $1,536                                                  |         |                                               |  |                     |   | 7,680                       |         
|                           |                                                                | Less: Reclassification adjustment for losses included in net loss, net of income tax benefit of $9,635   |         |                                               |  |                     |   | (11,563                     | )       
|                           |                                                                |                                                                                                          |         |                                               |   |                     |   |                             |         
|                           |                                                                | Change in unrealized losses on available-for-sale securities                                             |         |                                               |  |                     |   | 19,243                      |         
|                           |                                                                |                                                                                                          |         |                                               |   |                     |   |                             |         
|                           |                                                                | Change in unrealized losses on derivative hedging instrumentscash flow hedges:                          |         |                                               |   |                     |   |                             |         
|                           |                                                                | Net derivative losses, net of income tax benefit of $12                                                  |         |                                               |  |                     |   | (22                         | )       
|                           |                                                                | Less: Reclassification adjustment for losses included in net loss, net of income tax benefit of $534     |         |                                               |  |                     |   | (986                        | )       
|                           |                                                                |                                                                                                          |         |                                               |   |                     |   |                             |         
|                           |                                                                | Change in unrealized losses on derivative hedging instruments                                            |         |                                               |  |                     |   | 964                         |         
|                           |                                                                |                                                                                                          |         |                                               |   |                     |   |                             |         
|                           |                                                                | Translation adjustment                                                                                   |         |                                               |  |                     |   | 17,604                      |         
|                           |                                                                | Additional minimum pension liability adjustment, net of tax effect of $3,173                             |         |                                               |  |                     |   | (5,404                      | )       
|                           |                                                                |                                                                                                          |         |                                               |   |                     |   |                             |         
|                           | Comprehensive loss                                             |                                                                                                          |         |                                               |   |                     |   |                             |         
|                           |                                                                |                                                                                                          |         |                                               |   |                     |   |                             |         
|                           | Dividends and distributions to parent company                  |                                                                                                          |         | (17,331                                       | ) |                     |  |                             |         
|                           | Capital contribution from parent company                       |                                                                                                          |         | 11,687                                        |   |                     |  |                             |         
|                           | Compensation related to ISP stock options issued as
incentives |                                                                                                          |         | 118                                           |   |                     |  |                             |         
|                           |                                                                |                                                                                                          |         |                                               |   |                     |   |                             |         
|Balance, December 31, 2002 |                                                                | $                                                                                                        | 640,816 |                                               | $ | (28,695             | ) | $                           | (127,368

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

F-32

---



|                           |                                                     | Common Stock
and Additional
Paid-In Capital                                                       |         | Accumulated
Other
Comprehensive
Income (Loss) |   | Accumulated
Deficit |   | Comprehensive
Income (Loss) |         
|-------------------------- | --------------------------------------------------- | ------------------------------------------------------------------------------------------------- | ------- | --------------------------------------------- | - | ------------------- | - | --------------------------- | --------
|
|Balance, December 31, 2002 |                                                     | $                                                                                                 | 640,816 |                                               | $ | (28,695             | ) | $                           | (127,368
|                           | Comprehensive income, year ended December 31, 2003: |                                                                                                   |         |                                               |   |                     |   |                             |         
|                           |                                                     | Net income                                                                                        |         |                                               |  |                     |   |                            |         
|                           |                                                     |                                                                                                   |         |                                               |   |                     |   |                             |         
|                           |                                                     | Other comprehensive income, net of tax:                                                           |         |                                               |   |                     |   |                             |         
|                           |                                                     | Unrealized holding gains, net of income taxes of $7,246                                           |         |                                               |  |                     |   | 12,851                      |         
|                           |                                                     | Less: Reclassification adjustment for gains included in net income, net of income taxes of $1,040 |         |                                               |  |                     |   | 1,056                       |         
|                           |                                                     |                                                                                                   |         |                                               |   |                     |   |                             |         
|                           |                                                     | Change in unrealized losses on available-for-sale securities                                      |         |                                               |  |                     |   | 11,795                      |         
|                           |                                                     |                                                                                                   |         |                                               |   |                     |   |                             |         
|                           |                                                     | Translation adjustment                                                                            |         |                                               |  |                     |   | 19,124                      |         
|                           |                                                     | Additional minimum pension liability adjustment, net of tax effect of $421                        |         |                                               |  |                     |   | (716                        | )       
|                           |                                                     |                                                                                                   |         |                                               |   |                     |   |                             |         
|                           | Comprehensive income                                |                                                                                                   |         |                                               |   |                     |   |                             |         
|                           |                                                     |                                                                                                   |         |                                               |   |                     |   |                             |         
|                           | Capital contribution from parent company            |                                                                                                   |         | 1,451                                         |   |                     |  |                             |         
|                           |                                                     |                                                                                                   |         |                                               |   |                     |   |                             |         
|Balance, December 31, 2003 |                                                     | $                                                                                                 | 642,267 |                                               | $ | 1,508               |   | $                           | (84,962 
|                           |                                                     |                                                                                                   |         |                                               |   |                     |   |                             |         

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

F-33

---



INTERNATIONAL SPECIALTY HOLDINGS INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.    Organization

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. ("ISP"). International Specialty Holdings Inc. (the "Company"), a wholly owned
subsidiary of ISP, was formed on June 5, 2001 in connection with the corporate restructuring discussed below. ISP Opco Holdings Inc., which changed its name on June 5, 2001 to ISP
Chemco Inc. ("ISP Chemco"), a wholly owned subsidiary of the Company, was formed on June 24, 1998 in connection with the Merger and 100 shares of its common stock were issued to ISP. At
the time of the Merger, substantially all of the assets and liabilities of Old ISP were transferred to ISP Chemco. The accompanying consolidated financial statements have been prepared on a basis
which retroactively reflects the formation of the Company, as discussed above, for all periods presented. The net income presented up to the date that the Company was formed has been reflected as
dividends and/or distributions to ISP.

In
connection with the financing transactions discussed in Note 14, ISP completed a corporate restructuring (the "Restructuring") of its business in June 2001 in order to
separate its investment assets from its chemicals and mineral products businesses. As part of the Restructuring, ISP Chemco transferred net assets of approximately $235.7 million, consisting of
all of its investment assets, totaling $336.7 million, associated short-term debt and the outstanding stock of certain subsidiaries to the Company, which, in turn, transferred those
assets to its newly formed subsidiary, ISP Investco LLC ("ISP Investco"). Subsequent to the completion of these transactions, ISP Chemco's assets consist solely of those related to ISP's chemicals and
mineral products businesses.

The
Company is engaged principally in the manufacture and sale of a wide range of specialty and industrial chemicals and mineral products. See Notes 19 and 20 for a description of and
financial information relating to the Company's business segments and foreign and domestic operations.

Note 2.    Summary of Significant Accounting Policies



All subsidiaries are consolidated and intercompany transactions have been eliminated.



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make
certain estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include: the carrying amount of property, plant and
equipment; valuation allowances for receivables, inventories and deferred income tax assets; environmental liabilities; valuation of derivative instruments; assets and obligations related to employee
benefits; and other contingencies. Actual results could differ from those estimates. In the opinion of management, the consolidated financial statements herein contain all adjustments necessary to
present fairly the financial position and the results of operations and cash flows of the Company for the periods presented. The Company does not anticipate any changes in management estimates that
would have a material impact on operations, liquidity or capital resources.

F-34

---



The Company's revenue recognition policy is in accordance with accounting principles generally accepted in the United States of America, which require the
recognition of sales when there is evidence
of a sales agreement, the delivery of goods has occurred, the sales price is fixed or determinable and the collectibility of revenue is reasonably assured. Normal terms for sales of specialty and
industrial chemicals are 30 days net. Normal terms for sales of mineral products include a 1% discount if payment is made not later than the 15th of the month following date of sale. There are
no special conditions for sales that occur through third party distributors.



The fair value of cash and cash equivalents, including money market funds, receivables and short-term debt approximate their carrying value due to
their short-term nature. Investments in equity securities have readily determinable fair values and are classified as investments in trading securities or investments in
available-for-sale securities. Trading securities are recorded at fair value with the change in fair value recorded in the Consolidated Statements of Operations as investment
income. Available-for-sale securities are recorded at fair value, with the change in fair value recorded, net of income tax effect, as a component of "Accumulated other
comprehensive income (loss)." See Note 5 for a discussion of the Company's short-term investments. See Note 14 for a discussion of the Company's long-term debt.
The following table summarizes the notional and fair values of the Company's other financial instruments.

|                                       |  | December 31, 2002 |      | December 31, 2003
|-------------------------------------- |  | ----------------- | ---- | -----------------
|
|
|Interest rate financial instruments    |  | $                 |     |                  
|Foreign currency financial instruments |  |                   | 10.0 |                  
|Equity-related financial instruments   |  |                   | 4.4  |                  



Cash and cash equivalents include cash on deposit and debt securities purchased with original maturities of three months or less.



Trading and available-for-sale securities are recorded at fair value. For securities classified as trading (including short positions),
unrealized holding gains and losses are reflected in the results of operations. For securities classified as available-for-sale, unrealized holding gains (losses), net of
income tax effect, are included in a separate component of shareholder's equity, "Accumulated other comprehensive income (loss)," and amounted to $(13.2) and $(1.4) million as of
December 31, 2002 and 2003, respectively. The Company periodically reviews available-for-sale securities for other than temporary impairment when the cost basis of a
security exceeds the market value. The impairment is charged to earnings and a new cost basis for the security is established. Dividend and interest income are recognized when earned.

F-35

---



Inventories are stated at the lower of cost or market. The LIFO (last-in, first-out) method is utilized to determine cost for
substantially all domestic acetylene-based finished goods and work-in-process and the raw materials to produce these products. All other inventories are valued on the FIFO
(first-in, first-out) method.



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. Repairs in excess of $5,000 are capitalized if the repair both extends the useful life of an asset
beyond its original estimated useful life and adds to the value of the asset. Certain interest charges are capitalized during the period of construction as part of the cost of property, plant and
equipment. Capitalized interest charges amounted to $355,000, $157,000 and $284,000 for 2001, 2002 and 2003, respectively.



Plant turnarounds are scheduled periodically to complete plant maintenance and replenish catalyst that is utilized in the chemical processes and which has a
limited life. Costs related to these turnarounds are charged to operations in the year they are incurred.



Goodwill, which arose principally from both the 1989 management-led buyout of the predecessor company to the Company's former parent company,
G-I Holdings Inc., and as a result of the Merger (see Note 1), was being amortized on the straight-line method over a period of approximately
40 years prior to January 1, 2002. With the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," effective as of January 1, 2002, goodwill is no longer subject to amortization over its estimated
useful life. However, goodwill is subject to at least an annual assessment for impairment and more frequently if circumstances indicate a possible impairment. See "Valuation of Long-Lived
Assets" below and also Note 12.



The Company's intangible assets at December 31, 2003 were acquired in the acquisition of the Company's biocides business as of December 31, 2001
(see Note 18). Intangible assets with a finite life are amortized on a straight-line basis over the estimated useful lives of the assets and reviewed for impairment in accordance
with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (see below). Intangible assets with indefinite useful lives are not amortized, but are instead
tested for impairment at least annually in accordance with the provisions of SFAS No. 142. The useful lives of all intangible assets are evaluated each reporting period to determine if a
revision is warranted. See "Valuation of Long-Lived Assets" below and also Note 12.

F-36

---



Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." At least
annually, and more often if events or circumstances warrant such a review, the Company reviews the recoverability of long-lived assets to be held and used, including goodwill and
intangible assets, and identifies and measures any potential impairments. The carrying value of a long-lived asset to be held and used is considered impaired when the anticipated
undiscounted cash flows from such an asset are less than the carrying value of the asset. If that occurs, a loss would be recognized based on the amount by which the carrying value exceeds the fair
value of the long-lived asset.



Debt issuance costs are amortized to expense over the life of the related debt. Unamortized debt issuance costs of $17.7 and $14.9 million are included in
"Other assets" in the Consolidated Balance Sheets at December 31, 2002 and 2003, respectively.



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 with respect to such environmental matters, and certain other environmental compliance expenses, as of December 31, 2002 and 2003, was $22.4 and $20.8 million, respectively,
before reduction for insurance recoveries included in the Consolidated Balance Sheets of $24.0 and $28.1 million, respectively. The gross environmental liability is included within "Accrued
liabilities" and "Other liabilities," and the estimated recoveries are included within "Other assets." See Note 21 for further discussion with respect to environmental liabilities and estimated
insurance recoveries.



Assets and liabilities of foreign subsidiaries are translated at year-end exchange rates. Income and expenses are translated at average exchange rates
prevailing during the year. The effects of these translation adjustments are reported in a separate component of shareholder's equity, "Accumulated other comprehensive income (loss)," and amounted to
$(10.1) and $9.0 million as of December 31, 2002 and 2003, respectively. Exchange gains/ (losses) arising from transactions denominated in a currency other than the functional currency
of the entity involved, principally related to the revaluation of payables and receivables, are included in other expense, net, and amounted to $(4.2), $2.2 and $5.6 million in 2001, 2002 and
2003, respectively.



Comprehensive income (loss) includes net income (loss), unrealized gains and losses from investments in available-for-sale securities,
unrealized gains and losses from derivative hedging instruments, foreign currency translation adjustments and additional minimum pension liability adjustments. The Company has chosen to disclose
comprehensive income (loss) in the Consolidated Statements of Shareholder's Equity.

F-37

---

Changes
in the components of "Accumulated other comprehensive income (loss)," net of tax, for the years 2001, 2002 and 2003 are as follows:

|                           |  | Unrealized
Gains (Losses)
on Available-
for-Sale
Securities |         | Unrealized
Losses on
Derivative
Hedging
Instruments |   | Cumulative
Foreign
Currency
Translation
Adjustment |   | Additional
Minimum
Pension
Liability
Adjustment |         | Accumulated
Other
Comprehensive
Income (Loss) |  
|-------------------------- |  | ----------------------------------------------------------- | ------- | --------------------------------------------------- | - | -------------------------------------------------- | - | ----------------------------------------------- | ------- | --------------------------------------------- | -
|
|Balance, December 31, 2000 |  | $                                                           | 34,020  |                                                     | $ |                                                   |   | $                                               | (22,019 | )                                             | $
|Change for the year 2001   |  |                                                             | (66,463 | )                                                   |   | (964                                               | ) |                                                 | (5,676  | )                                             |  
|                           |  |                                                             |         |                                                     |   |                                                    |   |                                                 |         |                                               |  
|Balance, December 31, 2001 |  | $                                                           | (32,443 | )                                                   | $ | (964                                               | ) | $                                               | (27,695 | )                                             | $
|Change for the year 2002   |  |                                                             | 19,243  |                                                     |   | 964                                                |   |                                                 | 17,604  |                                               |  
|                           |  |                                                             |         |                                                     |   |                                                    |   |                                                 |         |                                               |  
|Balance, December 31, 2002 |  | $                                                           | (13,200 | )                                                   | $ |                                                   |   | $                                               | (10,091 | )                                             | $
|Change for the year 2003   |  |                                                             | 11,795  |                                                     |   |                                                   |   |                                                 | 19,124  |                                               |  
|                           |  |                                                             |         |                                                     |   |                                                    |   |                                                 |         |                                               |  
|Balance, December 31, 2003 |  | $                                                           | (1,405  | )                                                   | $ |                                                   |   | $                                               | 9,033   |                                               | $
|                           |  |                                                             |         |                                                     |   |                                                    |   |                                                 |         |                                               |  



Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company
records a provision for income taxes and/or foreign withholding taxes on the cumulative earnings of foreign subsidiaries, net of any available foreign tax credits. The Company and its subsidiaries are
included in a consolidated Federal income tax return filed by ISP and have entered into tax sharing agreements with ISP and ISP Chemco (see Note 8).



Shipping and handling costs included in "Selling, general and administrative" expenses amounted to $29.1, $31.2 and $32.4 million for 2001, 2002 and 2003,
respectively.



Research and development costs are charged to operations as incurred and amounted to $25.4, $26.0 and $25.3 million for 2001, 2002 and 2003, respectively.
Such amounts are included in "Selling, general and administrative" expenses in the accompanying Consolidated Statements of Operations.



In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148, "Accounting for Stock-Based
CompensationTransition and Disclosure," an amendment of SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 148 provides alternative methods of

F-38

---

transition
for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 for both annual and interim reporting periods by requiring disclosures in a tabular format to reconcile net income as reported to pro forma net income as if the
fair value method was used. Certain of the disclosure modifications required for fiscal years ending after December 15, 2002 were disclosed in the Company's 2002 annual report on
Form 10-K. However, as discussed in Note 17, with the completion of the going private transaction by ISP in February 2003, the Company's stock-based compensation plans
were terminated and payments were made in accordance with the terms of the merger agreement. Therefore, the provisions of SFAS No. 148 are no longer applicable to the Company as it relates to
those plans. In addition, the Company currently accounts for incentive units granted to eligible Company employees pursuant to ISP's 2000 Long-Term Incentive Plan and 2003 Executive
Long-Term Incentive Plan under the accounting prescribed by FASB Interpretation No. ("FIN") 28, "Accounting for Stock Appreciation Rights and Other Variable Stock Option and Award
Plans," which requires an entity to measure compensation as the amount by which the Book Value (as defined) of the incentive units covered by the grant exceeds the option price or value specified of
such incentive units at the date of grant. Changes, either increases or decreases, in the Book Value of those incentive units between the date of grant and the measurement date result in a change in
the measure of compensation for the right or award. The Company expects to continue to account for its long-term incentive units under the accounting prescribed by FIN 28. Since
compensation expense related to such incentive units is included in the actual Consolidated Statements of Operations, the Company's pro forma net income under SFAS No. 123 would have been the
same as actual net income.



The Company enters into forward foreign exchange instruments in order to hedge a portion of both its borrowings denominated in foreign currency and transactions
related to the operations of foreign subsidiaries. All forward contracts are reflected in the Consolidated Balance Sheets at their fair market value.

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, 2002, the U.S. dollar equivalent notional value of outstanding forward foreign exchange contracts was $10.0 million. There were no outstanding forward
foreign exchange contracts as of December 31, 2003. All foreign exchange contracts outstanding as of December 31, 2002 were entered into as a hedge of intercompany loans, representing
100% of the Company's foreign currency exposure with respect to such loans. 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. See "Derivatives and Hedging" below.

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 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.

F-39

---





In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138. SFAS
No. 133 and SFAS No. 138 established 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 and SFAS No. 138 require that changes in a derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria
are met, which for qualifying hedges, allow a derivative's gains and losses to offset related results on the hedged item in the Consolidated Statement of Operations.

The
Company adopted SFAS No. 133 and SFAS No. 138 as of January 1, 2001. Accounting for interest rate swaps and foreign exchange forward contracts held by the
Company was affected by implementation of these standards. The earnings impact of the transition adjustments related to the initial adoption of the standards was an after-tax loss of
approximately $0.4 million, which was recorded in the first quarter of 2001 as the cumulative effect of a change in accounting principle.

At
the date the derivative is designated as a hedge, the Company formally documents the hedging relationship and its risk management objective and strategy for undertaking the hedge, the
nature of the risk being hedged, item being hedged, the hedging instrument, how the hedging instrument's effectiveness in offsetting the hedged risk will be assessed, and a description of the method
of measuring ineffectiveness. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair value or cash flows of hedged items.

As
discussed in Note 14, in June 2001, ISP Chemco entered into $450.0 million of Senior Credit Facilities, which include a $225.0 million term loan. The
Company designated interest rate swaps, with a notional amount of $100 million, as a hedge of its exposure to changes in the Eurodollar rate under the term
loan. The interest rate swaps were structured to receive interest based on the Eurodollar rate and pay interest on a fixed rate basis. The interest rate swaps were designated to have a cash flow
hedging relationship whereby the interest rate swaps hedged the risk of changes in the Eurodollar rate related to borrowings against the term loan through July 2002. Those swaps matured in June
and July of 2002. The interest rate swaps were deemed to be highly effective throughout the term of their designation as a cash flow hedge. During 2002, $1.5 million related to the interest
rate swaps was reclassified and charged against interest expense.

Derivatives
held by the Company not designated as hedging instruments include total return equity swaps, interest rate swaps and forward foreign exchange instruments. These derivatives
are being marked-to-market each period, with unrealized gains and losses included in results of operations. The total return equity swaps are held for investment income
purposes. The Company enters into interest rate swaps in order to economically hedge interest rate risk associated with investments in securities for which the market value is correlated with interest
rate changes. Foreign exchange forward contracts are held to offset exposure to changes in exchange rates affecting intercompany loans.



Certain amounts in the 2001 and 2002 Consolidated Financial Statements have been reclassified to conform to the 2003 presentation.

F-40

---

Note 3.    New Accounting Standards

In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others." FIN 45 clarifies the requirements for a guarantor's accounting for and disclosures of certain guarantees issued and outstanding. The provisions of FIN 45 apply to guarantee contracts that
contingently require the guarantor to make payments (in cash, financial instruments, other assets, shares of stock or provision of services) to the guaranteed party for guarantees such as a financial
standby letter of credit, a market value guarantee on either a financial or nonfinancial asset owned by the guaranteed party and a guarantee of the collection of the scheduled contractual cash flows
from financial assets held by a special-purpose entity. FIN 45 also applies to indemnification contracts and indirect guarantees of indebtedness of others. The requirements of FIN 45 for the initial
recognition and measurement of the liability for a guarantor's obligations are to be applied only on a prospective basis to guarantees issued or modified after December 31, 2002. A subsidiary's
guarantee of the debt of its parent (as disclosed in
Note 14) is not subject to the initial recognition and measurement provisions of FIN 45 but is subject to its disclosure requirements. The Company currently does not have any guarantees,
indemnification contracts or indirect guarantees of indebtedness of others that would be subject to the initial recognition and measurement provisions of FIN 45. As discussed in Note 14, ISP
Chemco's 101/4% Senior Subordinated Notes due 2011 are guaranteed by all of ISP Chemco's domestic subsidiaries, other than certain immaterial subsidiaries and the Company's accounts
receivable financing subsidiary.

In
April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies
financial accounting and reporting for derivative instruments and hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after
June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 has not had an immediate impact on the Company's consolidated financial
statements.

In
December 2003, the FASB issued a revised FIN 46, "Consolidation of Variable Interest Entities," which had originally been issued in January 2003. In accordance with FIN
46, a variable interest entity will be consolidated if either the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated
financial support from other parties, or as a group, the holders of the equity investment at risk lack any one of the following three characteristics of a controlling financial interest:
(1) the direct or indirect ability to make decisions about an entity's activities; (2) the obligation to absorb the expected losses of the entity if they occur; (3) the right to
receive the expected residual returns of the entity if they occur. All companies with variable interests in variable interest entities subject to FIN 46 shall apply the provisions of FIN 46 no later
than the end of the first reporting period that ends after March 15, 2004. The Company does not currently have an interest in a variable interest entity. Therefore, FIN 46 will not have an
immediate impact on the Company's consolidated financial statements.

Note 4.    Early Retirement of Debt

On January 14, 2002, the Company's parent company, ISP, redeemed the remaining $307.9 million aggregate principal amount of its 9% Senior Notes due
2003. As a result, the Company recorded an extraordinary loss in 2002 on the early retirement of debt of $4.7 million ($7.2 million before income tax benefit of $2.5 million). In
April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS
No. 145 eliminates the requirement of SFAS No. 4 that gains and losses on the early

F-41

---

extinguishments
of debt be recorded as an extraordinary item unless such gains and losses meet the criteria of Accounting Principles Board Opinion No. 30 for classification as extraordinary.
The Company adopted SFAS No. 145 effective January 1, 2003 and, as a result, the Consolidated Statement of Operations for the year ended December 31, 2002 was restated to
reclassify the pre-tax extraordinary charge of $7.2 million on the early retirement of debt to a separate line item of pre-tax income. The tax benefit of
$2.5 million related to the extraordinary charge has been reclassified and is included in "Income taxes."

Note 5.    Short-term Investments and Investment Income (Loss)

Investment income (loss), net, totaled $(2.5), $48.1 and $14.9 million in 2001, 2002 and 2003, respectively. Investment income (loss) in 2001 and 2002
included $27.6 and $39.0 million, respectively, of other than temporary impairment charges for certain available-for-sale securities held in the Company's investment
portfolio. The determination of cost in computing realized and unrealized gains and losses is based on the specific identification method.

Investment
income (loss) is comprised of the following:

|                                                                                                    |                       | Year Ended December 31, |        
|--------------------------------------------------------------------------------------------------- | --------------------- | ----------------------- | -------
|
|
|Sales of available-for sale securities:                                                             |                       |                         |        
|                                                                                                    | Gross realized gains  |                         | $      
|                                                                                                    | Gross realized losses |                         |        
|Write-down of available-for-sale securities to fair value                                           |                       |                         | (27,579
|Realized and unrealized gains (losses), net, on trading securities and other short-term investments |                       |                         | 20,355 
|Interest and dividend income                                                                        |                       |                         | 6,845  
|Investment-related expenses                                                                         |                       |                         | (6,903 
|                                                                                                    |                       |                         |        
|Investment income (loss), net                                                                       |                       | $                       | (2,461 
|                                                                                                    |                       |                         |        

Included
in "Accumulated other comprehensive income (loss)" at December 31, 2002 and 2003 are unrealized holding gains and losses on available-for-sale
securities, as follows:

|                                                   |                                   | December 31, |        
|-------------------------------------------------- | --------------------------------- | ------------ | -------
|
|
|Equity securities:                                 |                                   |              |        
|                                                   | Equity securities with net gains  |              | $      
|                                                   | Equity securities with net losses |              |        
|                                                   |                                   |              |        
|Total unrealized pre-tax losses                    |                                   |              | (19,574
|Tax effect                                         |                                   |              | 6,374  
|                                                   |                                   |              |        
|Unrealized losses on available-for-sale securities |                                   | $            | (13,200
|                                                   |                                   |              |        

F-42

---

The
following table summarizes the status of the Company's investments in equity securities for which the market value is below cost at December 31, 2003:

|             |  | Market below Cost
Less than 12 Months |   | Market below Cost
12 Months or Longer |   | Total
|------------ |  | ------------------------------------- | - | ------------------------------------- | - | -----
|
|
|Common Stock |  | $                                     | 0 |                                       | $ | 0    

Included in available-for-sale securities is an investment in a certain common stock with a market value that has been
below its cost basis for longer than twelve months. As of December 31, 2003, the market value of the equity security was less than 4% below its cost basis, and the market price was trending
upward. The Company reviewed investment analysts' reports which concluded that business prospects for this company are positive and indicate target prices above the cost basis. Subsequent to the
balance sheet date, the market price exceeded the cost basis. Another factor considered was the stock's volatility; during 2003, the market price per share ranged from 18% below to 3% above the value
on December 31, 2003. Based upon these factors in aggregate, management believes that the related unrealized loss at December 31, 2003 was not other than temporary.

The
total market value of available-for-sale securities at December 31, 2002 and 2003, comprised solely of equity securities, was $274.6 and
$42.2 million, respectively.

For
equity securities classified as trading at December 31, 2002 and 2003, the market value of equity securities held long was $250.5 and $96.0 million, respectively, and
$286.2 and $115.4 million, respectively, for short positions in common stocks. At December 31, 2002 and 2003, these equity securities held long had an unrealized loss of
$6.7 million and an unrealized gain of $11.2 million,
respectively. Short positions in common stock held at December 31, 2002 and 2003 had an unrealized gain of $3.3 million and an unrealized loss of $6.8 million, respectively.

During
2003, the Company entered into interest rate swaps with a notional value of $23.0 million in order to economically hedge interest rate risk associated with investments in
securities for which the market value is correlated with interest rate changes. The interest rate swaps are marked-to-market each month, with unrealized gains and losses
included in the results of operations. At December 31, 2003, the unrealized gain related to the interest rate swaps was $48,000.

The
Company enters into equity-related financial instruments, including total return equity swaps, as a means to manage its exposure to market fluctuations on its short-term
investments and as a substitute for physical transactions in equity securities. With these financial instruments, the Company participates in market fluctuations of the underlying security without
dispositive control of the shares or voting rights on the shares. This provides the Company with a means of capturing the performance of the underlying security, often at low transaction costs. These
contracts are subject to strict internal controls, including maximum exposure levels and counterparty risk. The counterparties to these contracts are major financial institutions with high credit
standings. The Company controls risk through credit approvals, limits and monitoring procedures. The Company does not anticipate nonperformance by counterparties to these contracts. With respect to
such contracts, the Company is exposed to the risk of market loss.

F-43

---

As
of December 31, 2002 and 2003, the notional value of equity-related long contracts was $4.0 and $282.1 million, respectively, and the notional value of equity-related
short contracts was $0.4 and $201.7 million, respectively. These contracts are marked-to-market each month, with unrealized gains and losses included in the results of
operations. The unrealized gains (losses) on equity-related long contracts at December 31, 2002 and 2003 were $(145,000) and $35.6 million, respectively. The unrealized gains on
equity-related short contracts were $6,000 and $1.5 million, respectively. The unrealized gains and losses referred to above are based on quotations as reported by various stock exchanges and
major broker/dealers.

Note 6.    Other Operating Gains and (Charges), Net

Other operating gains and (charges), net, are comprised of the following:

|                                                        |  | Year Ended December 31, |      
|------------------------------------------------------- |  | ----------------------- | -----
|
|
|Write-off of fixed assets                               |  | $                       |     
|Compensation expense on settlement of ISP stock options |  |                         |     
|Write-off of deferred costs                             |  |                         |     
|Gain on sale of assets                                  |  |                         |     
|Gain on contract termination                            |  |                         |     
|Gain on contract settlement                             |  |                         |     
|Reversal of excess restructuring reserves               |  |                         | 471  
|Gain on insurance claim                                 |  |                         | 1,600
|                                                        |  |                         |      
|Other operating gains and (charges), net                |  | $                       | 2,071
|                                                        |  |                         |      

In
December 2003, the Company decided to discontinue the manufacturing process at its Texas City, Texas facility for a product within the Industrial Chemicals business segment. As
a result, the Company recorded a $2.1 million charge for the write-off of production assets related to that manufacturing process. Sales of this product in 2001, 2002 and 2003 were
immaterial.

As
a result of ISP completing the going private transaction described in Note 17, the Company's stock-based compensation plans were terminated and payments were made in accordance
with the terms of the merger agreement. Accordingly, holders of approximately 2.7 million vested, in-the-money stock options outstanding and exercisable on
February 28, 2003 received a cash amount equal to the excess of $10.30 over the exercise price of such stock options, and compensation expense aggregating $1.5 million was recorded in
the first quarter of 2003.

The
Company has received approval from the New Jersey Turnpike Authority for a direct access ramp extension from the New Jersey Turnpike to the Company's Linden, New Jersey property.
With the planned New Jersey Turnpike access, it is likely that development alternatives such as warehousing will provide greater economic benefits than the Company's previously considered development
alternative of construction of a hazardous waste treatment, storage and disposal facility at this site. As a result of the Company's change in development strategy for the Linden property, in 2002,
the Company wrote off $7.6 million of deferred costs related to the development of the hazardous waste facility. The remaining Linden assets, which are being held for intended future sale, had
a net book

F-44

---

value
of $18.7 million at December 31, 2003, primarily the cost of the land. The Company has capitalized $3.1 million of costs related to the preparation of the Linden property
for sale.

In
December 2001, the Company entered into a letter agreement to sell its pharmaceutical fine chemicals business to Pharmaceutical Resources Incorporated ("PRI"), including its
Haifa, Israel-based FineTech, Ltd. research facility and its Columbus, Ohio manufacturing facility. In February 2002, the Company received a $250,000 payment from PRI in consideration of
extending the negotiations pursuant to the letter agreement. In March 2002, the Company announced that the sale would not be consummated due to the failure of PRI to proceed with the
transaction in a timely manner. Under the terms of the letter agreement, the Company received a $3.0 million break-up fee. Accordingly, the Company recognized a first quarter 2002
pre-tax gain of $2.8 million, representing the total cash received in February and March of 2002 of $3.2 million less related expenses of $0.4 million. Following
negotiations with PRI, in April 2002, the Company sold the Haifa-based research facility and intellectual property to PRI for $32.0 million. The Company recorded an additional second
quarter 2002 pre-tax gain, after expenses, of $5.5 million related to this sale.

In
the second quarter of 2002, the Company received $4.0 million in settlement of a manufacturing and supply contract with a customer of the fine chemicals business. After related
expenses, a pre-tax gain of $3.9 million was recognized.

As
part of a 2000 restructuring program, the Company provided $14.4 million to shut down its Seadrift, Texas and Belleville, New Jersey facilities and also shut down production of
butanediol at its Texas City, Texas facility. This program was completed in 2001 and $0.5 million of related reserves were reversed to income, principally representing excess severance
reserves.

In
2001, the Company recorded a $1.6 million gain on an insurance claim related to an industrial accident in 2001 at one of the Company's manufacturing facilities. Upon the
receipt of cash, an additional $0.7 million gain was recorded in 2002.

Note 7.    Other Expense, Net

Other expense, net, comprises 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 expenses that are not associated with ongoing operations or that are caused by events not reflective of the Company's normal business activities. Other
expense, net, is comprised of the following:

|                                                            |  | Year Ended December 31, |        
|----------------------------------------------------------- |  | ----------------------- | -------
|
|
|Foreign exchange gains (losses)                             |  | $                       | (4,211 
|Financing costs on sale of accounts receivable (see Note 9) |  |                         | (1,886 
|Environmental provision relating to discontinued operations |  |                         | (2,500 
|Legal fees and related costs                                |  |                         | (2,463 
|Miscellaneous other nonoperating expenses                   |  |                         | (5,001 
|                                                            |  |                         |        
|Other expense, net                                          |  | $                       | (16,061
|                                                            |  |                         |        

F-45

---

Note 8.    Income Taxes

The provision for income taxes is based on income before income taxes and cumulative effect of changes in accounting principles, as reported for financial
statement purposes, and is comprised of the following:

Year Ended December 31,2001

2002

2003(Thousands)United States

$
(4,827
)
$
16,503

$
(6,120
)Foreign


10,612


60,269


71,656Income before income taxes and cumulative effect of changes in accounting principles

$
5,785

$
76,772

$
65,536


Income
tax (provision) benefit consists of the following:

Year Ended December 31,2001

2002

2003(Thousands)Federal:Current

$
(11,149
)
$
8,072

$
(4,206
)Deferred


17,310


(24,418
)

(5,822
)Total Federal


6,161


(16,346
)

(10,028
)Foreign:Current


(7,318
)

(9,752
)

(8,682
)Deferred


416


692


(2,564
)Total foreign


(6,902
)

(9,060
)

(11,246
)State and local:Current


(840
)

(535
)

(1,015
)Deferred


(472
)

(148
)

180Total state and local


(1,312
)

(683
)

(835
)Income tax provision

$
(2,053
)
$
(26,089
)
$
(22,109
)


The
differences between the income tax provision computed by applying the statutory Federal income tax rate to income before income taxes and cumulative effect of changes in accounting

F-46

---

principles,
and the income tax provision reflected in the Consolidated Statements of Operations are as follows:

Year Ended December 31,2001

2002

2003(Thousands)Statutory tax provision

$
(2,025
)
$
(26,870
)
$
(22,938
)Impact of:Foreign operations


5,787


(2,868
)

(7,786
)State and local taxes, net of Federal benefits


(853
)

(444
)

(543
)Extraterritorial income exclusion benefit





4,200


4,550Nondeductible goodwill amortization


(5,774
)




Percentage depletion


659


1,403


2,100Other, net


153


(1,510
)

2,508Income tax provision

$
(2,053
)
$
(26,089
)
$
(22,109
)


The
components of the net deferred tax liability are as follows:

December 31,2002

2003(Thousands)Deferred tax liabilities related to:Property, plant and equipment

$
120,581

$
149,201Other


2,206


1,846Total deferred tax liabilities


122,787


151,047Deferred tax assets related to:Expenses not yet deducted for tax purposes


(29,935
)

(33,022
)Deferred foreign tax credits


(15,946
)

(17,231
)Mark-to-market adjustments


(14,589
)

(15,636
)Additional minimum pension liability adjustment


(3,173
)

(3,594
)Other


(23,153
)

(18,761
)Total deferred tax assets


(86,796
)

(88,244
)Net deferred tax liability


35,991


62,803Deferred tax assets reclassified to current assets


34,687


25,701Noncurrent deferred tax liability

$
70,678

$
88,504


Based
upon the level of historical taxable income and projections for future taxable income over the period in which the Company's deferred tax assets are deductible, management believes
that it is more likely than not that the Company will realize the benefits of these deductible differences at December 31, 2002 and 2003.

Effective
January 1, 2001, the Company entered into tax sharing agreements with ISP and ISP Chemco with respect to the payment of Federal income taxes and certain related matters.
The tax sharing agreements are substantially similar to the 1997 Tax Sharing Agreement described below. ISP

F-47

---

Chemco
and its domestic subsidiaries are a party to a Tax Sharing Agreement with ISP with respect to the payment of Federal income taxes and certain related matters dated as of January 1, 1997
(the "1997 Tax Sharing Agreement"). During the term of the 1997 Tax Sharing Agreement, which extends as long as ISP Chemco or any of its domestic subsidiaries, as the case may be, are included in a
consolidated Federal income tax return filed by ISP or a successor entity, ISP Chemco is obligated to pay to ISP an amount equal to those Federal income taxes ISP Chemco would have incurred if,
subject to certain exceptions, ISP Chemco (on behalf of itself and its domestic subsidiaries) filed its own consolidated Federal income tax return. These exceptions include, among others, that ISP
Chemco may utilize certain favorable tax attributes, i.e., losses, deductions and credits (except for a certain amount of foreign tax credits and, in general, net operating losses), only at the time
such attributes reduce the Federal income tax liability of ISP and its consolidated subsidiaries (the "ISP Group"); and that ISP Chemco may carry back or carry forward its favorable tax attributes
only after taking into account current tax attributes of the ISP Group. In general, subject to the foregoing limitations, unused tax attributes carry forward for use in reducing amounts payable by ISP
Chemco to ISP in future years. Subject to certain exceptions, actual payment for such attributes will be made by ISP to ISP Chemco only when ISP receives an actual refund of taxes from the Internal
Revenue Service (the "IRS") or, under certain circumstances, the earlier of the dates of the filing of Federal income tax returns of ISP Chemco for taxable years of ISP Chemco following the last
taxable year in which it was a member of the ISP Group. Foreign tax credits not utilized by ISP Chemco in computing its tax sharing payments will be refunded by ISP to ISP Chemco, if such credits
expire unutilized, upon the termination of the statute of limitations for the year of expiration.

The
1997 Tax Sharing Agreement provides for analogous principles to be applied to any consolidated, combined or unitary state or local taxes. Under the 1997 Tax Sharing Agreement, ISP
makes all decisions with respect to all matters relating to taxes of the ISP Group. The provisions of the 1997 Tax Sharing Agreement take into account both the Federal income taxes ISP Chemco would
have incurred if it filed its own separate Federal income tax return and the fact that ISP Chemco is a member of the ISP Group for Federal income tax purposes.

The
predecessor of ISP and certain of its domestic subsidiaries were parties to tax sharing agreements with members of a consolidated group for Federal income tax purposes that included
G-I Holdings Inc. (the "G-I Holdings Group") in certain prior years. Until January 1, 1997, ISP and its domestic subsidiaries were included in the consolidated
Federal income tax returns of the G-I Holdings Group and, accordingly, would be severally liable for any tax liability of the G-I Holdings Group in respect of those prior
years. Those tax sharing agreements are no longer applicable with respect to the tax liabilities of ISP for periods subsequent to January 1, 1997, because neither the Company nor any of its
domestic subsidiaries are members of the G-I Holdings Group for periods after January 1, 1997. In January 2001, G-I Holdings Inc. ("G-I
Holdings") filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code due to its asbestos-related bodily injury claims relating to the inhalation of asbestos fiber.

On
September 15, 1997, G-I Holdings 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 Rhône-Poulenc Surfactants and Specialties, L.P. (the
"surfactants partnership"), a partnership in which G-I Holdings held an interest. On September 21, 2001, the IRS filed a proof of claim with respect to such deficiency in the
G-I Holdings bankruptcy against G-I Holdings and ACI Inc., a subsidiary of G-I

F-48

---

Holdings
which also held an interest in the surfactants partnership and also has filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. If the proof of claim is
sustained, ISP and/or certain of its subsidiaries together with G-I Holdings and several current and former subsidiaries of G-I Holdings would be severally liable for taxes and
interest in the amount of approximately $282 million, computed as of December 31, 2003. On May 7, 2002, G-I Holdings, together with ACI Inc., filed an objection
to the proof of claim, which objection will be heard by the United States District Court for the District of New Jersey overseeing the G-I Holdings bankruptcy. G-I Holdings has
advised the Company that it believes that it will prevail in this tax matter involving the surfactants partnership, 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. See Note 21"Commitments and
Contingencies."

Note 9.    Sale of Accounts Receivable

In October 2001, the Company entered into a new agreement for the sale of its domestic receivables. This agreement replaced the previous agreement that
terminated in October 2001. The new agreement has a termination date of October 2004 and provides for up to $40.0 million in cash to be made available to the Company based on a
planned continuous sale program to a third party. The agreement permits the Company to sell certain domestic trade receivables on a non-recourse basis in exchange for cash. The Company
continues to service, administer and collect the trade receivables. At December 31, 2002 and 2003, the cash made available to the Company for the sale of receivables was $31.4 and $30.2
million, respectively. The program is accounted for under the provisions of SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." 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, is included
in other expense, net, and amounted to $1.9, $1.0 and $0.9 million in 2001, 2002 and 2003, respectively.

Note 10.    Inventories

Inventories are comprised of the following:

December 31,2002

2003(Thousands)Finished goods

$
113,912

$
113,227Work-in-process


32,407


36,415Raw materials and supplies


29,898


38,163Inventories

$
176,217

$
187,805


At
December 31, 2002 and 2003, $62.0 and $62.7 million, respectively, of domestic inventories were valued using the LIFO method. If the FIFO inventory method had been used
to value these inventories, they would have been $2.8 and $4.2 million higher at December 31, 2002 and December 31, 2003, respectively.

F-49

---

Note 11.    Property, Plant and Equipment

Property, plant and equipment is comprised of the following:

December 31,2002

2003(Thousands)Land and land improvements

$
83,459

$
87,898Buildings and building equipment


122,970


131,584Machinery and equipment


743,537


788,068Construction in progress


32,765


41,214Total


982,731


1,048,764Less accumulated depreciation


(417,018
)

(467,943
)Property, plant and equipment, net

$
565,713

$
580,821


See
Note 21 for information regarding capital leases.

Note 12.    Goodwill and Intangible Assets

The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," effective as of January 1, 2002. In accordance with the provisions of SFAS
No. 142, goodwill is no longer amortized but is subject to at least an annual assessment for impairment. Accordingly, the Company completed a transitional impairment test, effective
January 1, 2002, and recognized a goodwill impairment loss of $155.4 million as the cumulative effect of a change in accounting principle. The write-off represented the
goodwill associated with certain reporting units included in the Company's Specialty Chemicals and Industrial Chemicals business segments. The method of determining the loss followed the requirements
of SFAS No. 142, under which the fair value of each reporting unit was compared with its carrying amount. An independent appraisal firm used both a present value technique and an analysis of
comparable publicly traded chemical companies to determine fair value. The two methods were then correlated by the appraiser based on the relevance and reliability of the two approaches. While the
present value technique was only one of the two methods utilized, for that method the independent appraisal firm started with the Company's internal budgets and projections already reviewed and
utilized by ISP's Board of Directors. An appropriate terminal value was determined based on the final year's anticipated operating results. Inasmuch as the present value technique looks at future cash
flows, interest expense was included in the anticipated cash flows. The independent appraiser utilized a discount rate based on the chemical industry's weighted average cost of capital.

The
Company's annual tests for impairment were conducted in the fourth quarters of 2002 and 2003 based upon the September 29, 2002 and September 28, 2003 balance sheets,
respectively. These tests did not result in any additional impairment charges.

Presented
below is a reconciliation showing "Income before cumulative effect of changes in accounting principles" and "Net income (loss)", as reported in the Consolidated Statements of
Operations and as adjusted to exclude amortization of goodwill.

F-50

---



|                                                                                 |  | Year Ended December 31,
|-------------------------------------------------------------------------------- |  | -----------------------
|
|
|Income before cumulative effect of changes in accounting principles, as reported |  | $                      
|Add back: goodwill amortization                                                  |  |                        
|                                                                                 |  |                        
|Adjusted income before cumulative effect of changes in accounting principles     |  | $                      
|                                                                                 |  |                        
|Net income (loss), as reported                                                   |  | $                      
|Add back: goodwill amortization                                                  |  |                        
|                                                                                 |  |                        
|Adjusted net income (loss)                                                       |  | $                      
|                                                                                 |  |                        

The
following schedule reconciles the changes in the carrying amount of goodwill, by business segment, for the years ended December 31, 2002 and 2003. See Note 19 for a
discussion of a change in the composition of the Company's business segments, effective January 1, 2003. Also, see Note 18 for a discussion of the acquisition of Germinal S.A.

|                                                                                   |  | Specialty
Chemicals |         | Industrial
Chemicals |   | Mineral
Products |   | Total
Goodwill |       
|---------------------------------------------------------------------------------- |  | ------------------- | ------- | -------------------- | - | ---------------- | - | -------------- | ------
|
|Balance, January 1, 2002                                                           |  | $                   | 371,743 |                      | $ | 74,120           |   | $              | 51,539
|Impairment loss                                                                    |  |                     | (81,280 | )                    |   | (74,120          | ) |                |      
|Purchase accounting adjustment related to the acquisition of the biocides business |  |                     | (1,170  | )                    |   |                 |   |                |      
|Goodwill reduction related to the sale of the FineTech business                    |  |                     | (15,126 | )                    |   |                 |   |                |      
|                                                                                   |  |                     |         |                      |   |                  |   |                |       
|Balance, December 31, 2002                                                         |  | $                   | 274,167 |                      | $ |                 |   | $              | 51,539
|Acquisition of Germinal S.A                                                        |  |                     | 5,537   |                      |   |                 |   |                |      
|Translation adjustment related to the Germinal business goodwill                   |  |                     | (142    | )                    |   |                 |   |                |      
|                                                                                   |  |                     |         |                      |   |                  |   |                |       
|Balance, December 31, 2003                                                         |  | $                   | 279,562 |                      | $ |                 |   | $              | 51,539
|                                                                                   |  |                     |         |                      |   |                  |   |                |       

The
purchase accounting adjustment of $1.2 million in 2002 in the table above resulted from the final valuation of the biocides business during 2002, reflecting a reassessment of
the values assigned to goodwill, intangible assets and property, plant and equipment.

F-51

---

Intangible
assets at December 31, 2002 and 2003 relate to the biocides business which was acquired on December 31, 2001. Following is information as of December 31,
2002 and 2003 related to the Company's acquired intangible assets:

|                                  |                        |                                     |            | December 31, 2002 |        | December 31, 2003 |      
|--------------------------------- | ---------------------- | ----------------------------------- | ---------- | ----------------- | ------ | ----------------- | -----
|
|
|Amortized intangible assets:      |                        |                                     |            |                   |        |                   |      
|                                  | Patents                |                                     | 5-20 years |                   | $      | 669               |      
|                                  | Non-compete agreements |                                     | 2-5 years  |                   |        | 1,571             |      
|                                  | EPA registrations      |                                     | 5 years    |                   |        | 166               |      
|                                  |                        |                                     |            |                   |        |                   |      
|Total amortized intangible assets |                        |                                     |            |                   | 2,406  |                   |      
|                                  |                        |                                     |            |                   |        |                   |      
|Unamortized intangible assets:    |                        |                                     |            |                   |        |                   |      
|                                  | Trademarks             |                                     |            |                   |        | 2,962             |      
|                                  | EPA registrations      |                                     |            |                   |        | 4,648             |      
|                                  |                        |                                     |            |                   |        |                   |      
|                                  |                        | Total unamortized intangible assets |            |                   |        |                   | 7,610
|                                  |                        |                                     |            |                   |        |                   |      
|Total intangible assets           |                        |                                     |            | $                 | 10,016 |                   | $    
|                                  |                        |                                     |            |                   |        |                   |      

|                                |                              | (Thousands)
|------------------------------- | ---------------------------- | -----------
|Aggregate amortization expense: |                              |            
|                                | Year ended December 31, 2001 |            
|                                | Year ended December 31, 2002 |            
|                                | Year ended December 31, 2003 |            
|Estimated amortization expense: |                              |            
|                                | Year ended December 31,      |            
|                                | 2004                         |            
|                                | 2005                         |            
|                                | 2006                         |            
|                                | 2007                         |            
|                                | 2008                         |            

Note 13.    Related Party Transactions

Included in the Consolidated Balance Sheet at December 31, 2003 are the following long-term loans receivable from related parties:

(Thousands)ISP parent company

$
95,546ISP Elastomers


31,231Long-term loans receivable from related parties

$
126,777


In
connection with ISP's going private transaction described in Note 17, ISP borrowed a total of $94.0 million pursuant to five loan agreements, dated March 3, 2003,
with the Company's wholly owned

F-52

---

subsidiary,
ISP Investco, and its indirect, wholly owned subsidiary, ISP Ireland. The loans accrue interest at a fixed rate of 1.65% per annum. Three of the loans, with ISP Ireland, were for principal
amounts of up to $20.0 million, $10.0 million and $5.0 million, with maturity dates of six, nine and twelve months, respectively, and could be extended beyond their maturity dates
for periods of time equal to their original terms. The remaining two loans, with ISP Investco, are for amounts up to $30.0 million and $40.0 million, with maturity dates of three years
and can be extended beyond the maturity dates for an equal period of time. The three loans with ISP Ireland were repaid in December 2003. ISP Investco then entered into a new loan agreement in
December 2003 with ISP for an amount of up to $35.0 million. This loan has a term of 10 years and accrues interest at a fixed rate of 5.12% per annum. The balance of all such
loans outstanding at December 31, 2003 aggregated $95.5 million.

In
July 2003, the ISP parent company acquired the synthetic rubber business of Ameripol Synpol Corporation. ISP is operating the business under the name ISP Elastomers. Effective
July 28, 2003, the
Company entered into a promissory note with ISP Elastomers whereby the Company may from time to time loan to ISP Elastomers the principal amount of up to $50.0 million. The interest rate on the
note is at a rate per annum of 1.65%, and the note is due and payable on July 28, 2006. Interest receivable on the loans at December 31, 2003 is included in the receivable from ISP
Elastomers in the table below.

Included
in the Consolidated Balance Sheets are the following receivable (payable) balances with related parties, which arise from operating transactions between the Company and its
affiliates, including the sales of mineral products and the management agreement, as discussed below:

December 31,2002

2003(Thousands)ISP parent company

$
(43,773
)
$
1,285ISP Elastomers





1,298Building Materials Corporation of America ("BMCA")


12,748


11,026Other


(230
)

(225
)Receivable from (payable to) related parties, net

$
(31,255
)
$
13,384


The
$43.8 million payable to ISP at December 31, 2002 represented advances of cash from ISP to ISP Investco for investment purposes. The Company repaid this
amount in 2003 in connection with ISP's going private transaction (see Note 17).

In
May 2003, the Company entered into a new, long-term contract with BMCA, an indirect subsidiary of G-I Holdings Inc. and an affiliate of the
Company, to supply BMCA and its subsidiaries substantially all of their colored roofing granules and algae-resistant granules requirements, except for the requirements of certain of their roofing
plants that are supplied by third parties. The contract includes pricing discounts based on volume purchase targets, which, if the highest discount levels are reached over the term of the contract,
could adversely impact gross margins for the Mineral Products segment. In 2003, BMCA and its subsidiaries purchased a total of $77.7 million of mineral products from the Company, representing
8.7% of the Company's total net sales and 74.7% of the Company's net sales of mineral products. Sales by the Company to BMCA and its subsidiaries totaled $63.4 and $73.2 million for 2001 and
2002, respectively. The receivable from BMCA and its subsidiaries for sales of mineral products as of December 31, 2002 and 2003 was $11.8 and $10.6 million, respectively.

F-53

---

Pursuant
to a management agreement (the "Management Agreement"), the Company, through a subsidiary, provides certain general management, administrative, legal, telecommunications,
information and facilities services to BMCA and the ISP parent company. Charges by the Company for providing such services aggregated $6.8, $6.2 and $6.3 million for 2001, 2002 and 2003,
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. The receivable from such affiliates for management fees
as of December 31, 2002 and 2003 was $0.4 and $0.5 million, respectively. The Management Agreement is expected to be amended to extend the term of the agreement, effective
January 1, 2004, through December 31, 2004. 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 2003 under the Management Agreement, the aggregate amount payable to the Company under the Management Agreement for
2004 is expected to be approximately $5.6 million.

In
September 1999, ISP granted its President and Chief Executive Officer the right to purchase, and such officer purchased, 318,599 shares of ISP's common stock held in treasury
for a purchase price of $9.563 per share, or an aggregate of $3.0 million. Pursuant to the purchase agreement, ISP loaned such officer $3.0 million to purchase the shares of common
stock, which loan is evidenced by a recourse demand note with interest at the lowest applicable federal rate. The principal amount of the note is payable in four installments from June 2001
through January 2004. However, if this officer remains continuously employed by the Company through each installment date, the principal amount due on such installment date will be forgiven. As
the loan is forgiven, compensation expense is being recorded, including $762,000 in each of the years 2001, 2002 and 2003.

Note 14.    Long-term Debt and Lines of Credit

Long-term debt is comprised of the following:

|                                           |                                 | December 31, |        
|------------------------------------------ | ------------------------------- | ------------ | -------
|
|
|Senior Credit Facilities:                  |                                 |              |        
|                                           | Term loan maturing in June 2008 |              | $      
|                                           | Revolving credit facility       |              |        
|101/4% Senior Subordinated Notes due 2011  |                                 |              | 402,796
|105/8% Senior Secured Notes due 2009       |                                 |              | 200,000
|Obligations under capital leases (Note 21) |                                 |              | 1,319  
|                                           |                                 |              |        
|Total long-term debt                       |                                 |              | 825,740
|Less current maturities                    |                                 |              | (2,732 
|                                           |                                 |              |        
|Long-term debt less current maturities     |                                 | $            | 823,008
|                                           |                                 |              |        

On
June 27, 2001, ISP Chemco and three of its wholly owned subsidiaries jointly issued $205.0 million aggregate principal amount of 101/4%
Senior Subordinated Notes due 2011 (the "2011 Notes"). The net proceeds of $197.3 million, after discount and fees, were placed in a restricted cash escrow account and were distributed to the
Company's parent, ISP, to retire ISP's 93/4% Senior Notes due 2002 (the "2002 Notes"). During the third quarter of 2001, ISP retired $19.9 million of the 2002 Notes, and the
remaining $180.0 million of the 2002 Notes were retired on or prior to October 15,

F-54

---

2001.
On July 31, 2001, ISP Chemco and those same three wholly owned subsidiaries jointly issued an additional $100.0 million aggregate principal amount of the 2011 Notes. These notes
have the same terms as the 2011 Notes issued in June 2001. The net proceeds were $98.9 million, including $0.9 million of accrued interest from June 27, 2001 to the date of
issuance, of which $98.0 million was placed in a restricted cash escrow account and was distributed to ISP to retire a portion of ISP's 9% Senior Notes due 2003 (the "2003 Notes").

On
November 13, 2001, ISP Chemco and those same three wholly owned subsidiaries jointly issued an additional $100.0 million aggregate principal amount of the 2011 Notes.
These notes have the same terms as the 2011 Notes issued in June 2001 except with respect to interest accrual and registration rights. The net proceeds of $101.0 million were placed in a
restricted cash escrow account and were distributed to ISP to retire a portion of ISP's 2003 Notes. ISP retired $16.9 million aggregate principal amount of the 2003 Notes in 2001. On
January 14, 2002, ISP redeemed the remaining $307.9 million aggregate principal amount of the 2003 Notes, utilizing the restricted cash escrow account balance at December 31,
2001. The 2003 Notes were redeemed at a redemption price of 101.5% of the principal amount plus accrued and unpaid interest to the redemption date. As a result, the Company recorded a
$7.2 million pre-tax charge in 2002 for the early retirement of debt. The pre-tax charge was comprised of $4.6 million of call premium, $0.2 million of
remaining discount amortization and the write-off of $2.3 million of unamortized debt issuance costs.

The
2011 Notes are guaranteed by substantially all of ISP Chemco's domestic subsidiaries. The 2011 Notes were issued under an indenture which, among other things, places limits on the
ability of ISP Chemco and its subsidiaries, except its accounts receivable subsidiary and certain immaterial subsidiaries, to incur additional debt, issue preferred stock, incur liens, and pay
dividends or make certain other restricted payments and restricted investments.

In
June 2001, in a related transaction, ISP Chemco and its three wholly owned subsidiaries that issued the 2011 Notes also entered into $450.0 million of new senior secured
credit facilities (the "Senior Credit Facilities"), the initial borrowings under which were used to repay amounts outstanding under the Company's previous credit facility. The Senior Credit Facilities
are comprised of a $225.0 million term loan with a maturity of seven years and a $225.0 million revolving credit facility that will terminate in June 2006. The revolving credit
facility includes a borrowing capacity not in excess of $50.0 million for letters of credit. As of December 31, 2003, no borrowings and $9.8 million of letters of credit were
outstanding under the revolving credit facility. All borrowings under the Senior Credit Facilities are based on either an alternate base rate (based on the banks' base rate or on the federal funds
rate) or on the Eurodollar rate plus a margin based on the ratio of ISP Chemco's total consolidated debt to
EBITDA (as defined in the Senior Credit Facilities). The average interest rate at December 31, 2003 on borrowings under the Senior Credit Facilities was 4.2%. Commitment fees are charged to the
Company at a rate per annum equal to 0.50% of the average daily unused amount of the revolving credit facility. Commitment fees totaling $0.4, $1.1 and $1.1 million are included in interest
expense for 2001, 2002 and 2003, respectively.

The
Senior Credit Facilities require compliance with various financial covenants, including a total debt leverage maintenance ratio, a senior debt leverage maintenance ratio, an interest
coverage ratio and a minimum adjusted net worth. At December 31, 2003, the Company was in compliance with these covenants. In addition, the Senior Credit Facilities limit the ability of ISP
Chemco and its subsidiaries, except the Company's accounts receivable subsidiary and certain immaterial subsidiaries, to incur additional debt, issue preferred stock, incur liens, and pay dividends or
make certain other restricted

F-55

---

payments
and restricted investments. ISP Chemco and substantially all of its domestic subsidiaries are designated as obligors under the Senior Credit Facilities. The obligations of the obligors under
the Senior Credit Facilities are secured by a first-priority security interest in 100% of the capital stock of ISP Chemco's domestic subsidiaries and 66% of the capital stock of some of ISP Chemco's
foreign subsidiaries, and substantially all of the real and personal property of the obligors, except for the Company's accounts receivable subsidiary and certain immaterial subsidiaries.

On
December 13, 2001, the Company issued $200.0 million principal amount of 105/8% Senior Secured Notes due 2009 (the "2009 Notes"). The net proceeds from
this issuance were approximately $194.3 million, of which $125.7 million was placed in a restricted cash escrow account and used to redeem the remaining 2003 Notes. The 2009 Notes are
secured by a first priority lien on all of the outstanding capital stock of ISP Chemco. The 2009 Notes are structurally subordinated to all liabilities of the Company's subsidiaries. The 2009 Notes
were issued under an indenture which, among other things, limits the ability of the Company and its subsidiaries, except its unrestricted subsidiaries, to incur additional debt, enter into
transactions with affiliates, issue preferred stock, incur liens, and pay dividends or make certain other restricted payments and restricted investments. ISP Investco, one of the Company's wholly
owned subsidiaries, the subsidiaries of ISP Investco, the Company's accounts receivable subsidiary and certain immaterial subsidiaries have been designated as unrestricted subsidiaries under the
indenture related to the 2009 Notes. Borrowings by the Company, including those under the Senior Credit Facilities, are subject to the application of certain financial covenants contained in such
agreement and in the indentures relating to the 2009 Notes and the 2011 Notes. As of December 31, 2003, the Company was in compliance with such covenants, and the application of such covenants
would not have restricted available borrowings under the Senior Credit Facilities.

The
Senior Credit Facilities and the indenture governing the 2011 Notes contain additional affirmative and negative covenants affecting ISP Chemco and some of its subsidiaries, including
restrictions on transactions with affiliates, sale-leaseback transactions and mergers and transfers of all or substantially all of those subsidiaries' assets. The indenture governing the
2009 Notes also contains additional affirmative and negative covenants similar to those contained in the indenture governing the 2011 Notes affecting the Company and some of its subsidiaries. These
limitations do not apply to ISP Investco LLC, an unrestricted subsidiary. As of December 31, 2003, under the most restrictive of these
limitations, the Company could have paid dividends and other restricted payments of up to $48.6 million. Additionally, in the event the holders of the 2009 Notes were to foreclose on ISP
Chemco's capital stock following an event of default under those notes, the sale of the capital stock would constitute a change of control of ISP Chemco. Under the indenture governing the 2011 Notes,
if a change of control of ISP Chemco occurs, ISP Chemco is obligated to make an offer to repurchase the 2011 Notes from their respective holders. The terms of the Senior Credit Facilities, however,
prohibit the repayment of the 2011 Notes in that event unless and until such time as the indebtedness under the Senior Credit Facilities is repaid in full. Failure to make such repayment upon a change
of control would result in a default under the 2011 Notes. A change of control of ISP Chemco would also result in a default under the Senior Credit Facilities. In the event of a default under the
indenture governing the 2011 Notes or under the Senior Credit Facilities, the holders of the 2011 Notes or the lenders under the Senior Credit Facilities, as the case may be, could elect to accelerate
the maturity of the 2011 Notes or the loans under the Senior Credit Facilities. Those events could have a material adverse effect on the Company's financial condition and results of operations.

F-56

---



The
Company believes that the fair value of its non-public variable rate indebtedness approximates the carrying value of such indebtedness because the interest rates on such
indebtedness are at floating short-term rates. 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 2011 Notes and the 2009 Notes as of December 31, 2002 and 2003 was as follows:

|                                          |  | December 31, 2002 |         | December 31, 2003
|----------------------------------------- |  | ----------------- | ------- | -----------------
|
|
|101/4% Senior Subordinated Notes due 2011 |  | $                 | 402,796 |                  
|105/8% Senior Secured Notes due 2009      |  |                   | 200,000 |                  

The
aggregate maturities of long-term debt as of December 31, 2003 for the next five years are as follows:

(Thousands)2004

$
2,7222005


2,5262006


54,5702007


106,8752008


53,438


In
the above table, maturities for each of the years 2004 and 2005 include $2.3 million of maturities relating to the term loan under the Senior Credit Facilities. Maturities in
2006, 2007 and 2008 include $54.6, $106.9 and $53.4 million, respectively, relating to such term loan.

At
December 31, 2003, the Company's foreign subsidiaries had total available short-term lines of credit aggregating $4.2 million, of which $4.1 million
were unused. Short-term borrowings at December 31, 2002 were $125.8 million. The weighted-average interest rate on those borrowings was 2.0%. Short-term
borrowings at December 31, 2003 were not significant.

Included
in accrued liabilities at December 31, 2002 and 2003 is $23.9 and $23.4 million, respectively, of accrued interest payable on debt.

Under
the indenture for the 2009 Notes discussed above, ISP Investco has been designated an unrestricted subsidiary for purposes of covenants relating to the 2009 Notes. Unrestricted
subsidiaries, including ISP Investco, had no impact on the Company's net sales or operating income for the periods presented. The following table details, as required by the indenture governing the
2009 Notes, the impact of unrestricted subsidiaries on the Company's results of operations, as if ISP Investco was

F-57

---

formed
on January 1, 2001. The actual results of ISP Investco prior to its formation in June 2001 are included in the results of ISP Chemco.

Year Ended December 31,2001

2002

2003(Millions)Interest expense

$
(8.4
)
$
(2.9
)
$
(1.7
)Investment income (loss)


(2.5
)

48.1


14.8Miscellaneous other income (expense)


(0.9
)

0.3


0.2


Note 15.    Asset Retirement Obligations

The Company adopted SFAS No. 143, "Accounting for Asset Retirement Obligations," effective January 1, 2003. SFAS No. 143 establishes
accounting and reporting standards for legal obligations associated with the retirement of long-lived assets that result from the acquisition,
construction, development and the normal operation of a long-lived asset. The Company holds long-lived assets that have legal obligations associated with their retirement.
These assets include deep wells that require capping, minerals quarries that require reclamation and other plant assets subject to certain environmental regulations. SFAS No. 143 requires that
the fair value of a liability for an asset retirement obligation ("ARO") be recognized in the period in which it is incurred. Upon initial recognition of such liability, an entity must capitalize the
asset retirement cost by increasing the carrying amount of the related long-lived asset and subsequently depreciating the asset retirement cost over the useful life of the related asset.
Subsequent to the initial measurement of the ARO, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the
obligation. If the obligation is settled for other than the carrying amount of the liability, the Company would then recognize a gain or loss on settlement. As a result of adopting SFAS
No. 143, effective January 1, 2003, the Company recognized an after-tax charge of $1.0 million ($1.6 million before an income tax benefit of
$0.6 million) as the cumulative effect of a change in accounting principle, and recorded an ARO of $1.9 million and a net increase in property, plant and equipment of
$0.3 million.

The
change in the ARO during the year ended December 31, 2003 is as follows:

(Thousands)ARO liability recognized as of January 1, 2003

$
1,871Liabilities incurred, year ended December, 2003


28ARO liability accretion


178ARO liability balance, December 31, 2003

$
2,077


The
pro forma ARO would have been $1.7 million on January 1, 2002 and $1.9 million on December 31, 2002 if SFAS No. 143 had been applied during all
periods affected.

For
the year ended December 31, 2001, the net income on a pro forma basis would have been $3.2 million, including an additional $0.1 million due to additional
depreciation and liability accretion from AROs. For the year ended December 31, 2002, the net loss on a pro forma basis would have been $104.9 million, including an additional
$0.2 million due to additional depreciation and liability

F-58

---

accretion
from AROs. The net income for the year ended December 31, 2003 would have increased on a pro forma basis by $1.0 million to $43.4 million due to the elimination of the
cumulative effect of the change in accounting principle recorded on January 1, 2003 on the adoption of SFAS No. 143.

Note 16.    Benefit Plans

Eligible, full-time employees of the Company are covered by various benefit plans, as described below.



The Company provides a defined contribution plan for eligible employees. The Company contributes up to 7% of participants' compensation 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 $7.3, $7.6 and $7.6 million for 2001, 2002 and 2003, respectively.



The Company provides a noncontributory defined benefit retirement plan for certain hourly employees in the United States (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.

ISP
Marl GmbH, a wholly owned German subsidiary of the Company, provides a noncontributory defined benefit retirement plan for its hourly and salaried employees (the "ISP Marl Plan").
Benefits under this plan are based on average earnings over each employee's career with the Company.

The
Company's net periodic pension cost (income) for the Hourly Retirement Plan and the ISP Marl Plan included the following components:

|                                                |  | Hourly Retirement Plan |        | ISP Marl Plan
|----------------------------------------------- |  | ---------------------- | ------ | -------------
|
|
|
|Service cost                                    |  | $                      | 247    |              
|Interest cost                                   |  |                        | 1,932  |              
|Expected return on plan assets                  |  |                        | (3,084 | )            
|Amortization of actuarial losses                |  |                        | 36     |              
|Amortization of unrecognized prior service cost |  |                        | 190    |              
|                                                |  |                        |        |              
|Net periodic pension cost (income)              |  | $                      | (679   | )            
|                                                |  |                        |        |              

The
following tables set forth, for the years 2002 and 2003, reconciliations of the beginning and ending balances of the benefit obligation, fair value of plan assets, funded status and
amounts recognized in the Consolidated Balance Sheets related to the Hourly Retirement Plan and the ISP

F-59

---

Marl
Plan. The Company uses a December 31 measurement date for its retirement plans and postretirement medical and life insurance plan.

|                                                                                       |                                                | Hourly Retirement Plan |       | ISP Marl Plan |  
|-------------------------------------------------------------------------------------- | ---------------------------------------------- | ---------------------- | ----- | ------------- | -
|
|
|
|Change in benefit obligation:                                                          |                                                |                        |       |               |  
|                                                                                       | Benefit obligation at beginning of year        |                        | $     | 27,876        |  
|                                                                                       | Service cost                                   |                        |       | 290           |  
|                                                                                       | Interest cost                                  |                        |       | 2,108         |  
|                                                                                       | Plan amendments                                |                        |       | 1,482         |  
|                                                                                       | Plan settlement                                |                        |       |              |  
|                                                                                       | Effect of changes in exchange rates            |                        |       |              |  
|                                                                                       | Actuarial losses (gains)                       |                        |       | 2,181         |  
|                                                                                       | Benefits paid                                  |                        |       | (1,527        | )
|                                                                                       |                                                |                        |       |               |  
|                                                                                       | Benefit obligation at end of year              |                        | $     | 32,410        |  
|                                                                                       |                                                |                        |       |               |  
|Change in plan assets:                                                                 |                                                |                        |       |               |  
|                                                                                       | Fair value of plan assets at beginning of year |                        | $     | 30,491        |  
|                                                                                       | Actual return on plan assets                   |                        |       | 1,352         |  
|                                                                                       | Employer contributions                         |                        |       | 626           |  
|                                                                                       | Benefits paid                                  |                        |       | (1,527        | )
|                                                                                       |                                                |                        |       |               |  
|                                                                                       | Fair value of plan assets at end of year       |                        | $     | 30,942        |  
|                                                                                       |                                                |                        |       |               |  
|Reconciliation of funded status:                                                       |                                                |                        |       |               |  
|                                                                                       | Funded status                                  |                        | $     | (1,468        | )
|                                                                                       | Transition obligation                          |                        |       |              |  
|                                                                                       | Unrecognized prior service cost                |                        |       | 2,100         |  
|                                                                                       | Unrecognized actuarial (gains) losses          |                        |       | 8,577         |  
|                                                                                       |                                                |                        |       |               |  
|Net amount recognized in Consolidated Balance Sheets as (accrued) prepaid benefit cost |                                                | $                      | 9,209 |               | $
|                                                                                       |                                                |                        |       |               |  
|Amounts recognized in Consolidated Balance Sheets:                                     |                                                |                        |       |               |  
|                                                                                       | (Accrued) prepaid benefit cost                 |                        | $     |              |  
|                                                                                       | Accrued minimum pension liability              |                        |       | (1,468        | )
|                                                                                       | Intangible asset                               |                        |       | 2,100         |  
|                                                                                       | Accumulated other comprehensive loss           |                        |       | 8,577         |  
|                                                                                       |                                                |                        |       |               |  
|Net amount recognized in Consolidated Balance Sheets as (accrued) prepaid benefit cost |                                                | $                      | 9,209 |               | $
|                                                                                       |                                                |                        |       |               |  
|Change in amounts in other comprehensive loss:                                         |                                                |                        |       |               |  
|                                                                                       | Increase in additional minimum liability       |                        | $     | 10,677        |  
|                                                                                       | (Increase) decrease in intangible asset        |                        |       | (2,100        | )
|                                                                                       | (Increase) in other comprehensive loss         |                        |       | (8,577        | )

The
accumulated benefit obligation for all defined benefit pension plans was $35.0 million and $37.3 million at December 31, 2002 and 2003,
respectively.

F-60

---

Information
on actual and future expected benefit payments related to the Hourly Retirement Plan follows:

Actual benefit payments:

(Thousands)2001

$
1,4172002


1,5272003


1,672Future expected benefit payments:2004

$
1,9002005


1,9902006


2,0762007


2,2202008


2,3042009 through 2013


13,484


Year Ended December 31,2001
(Actual)

2002
(Actual)

2003
(Actual)

2004
(Expected)(Thousands)Employer contributions:Required

$
1,308

$
398

$


$
Additional discretionary





228





Total

$
1,308

$
626

$


$



Hourly Retirement Plan

ISP Marl PlanDecember 31,

December 31,2002

2003

2002

2003Weighted-average assumptions:Discount rate:As of January 1 (for determining net periodic
pension cost and projected benefit obligation
for years ended December 31)

7.25
%
6.75
%
6.5
%
6.5
%As of December 31 (for determining projected
benefit obligation at December 31)

6.75
%
6.25
%
6.5
%
6.5
%Expected long-term rate of return on assets

11.0
%
9.5
%
7.0
%
7.0
%Rate of compensation increase

N/A

N/A

3.0
%
3.0
%


F-61

---

The
following table highlights the sensitivity of the Company's pension obligations and expense to changes in assumptions related to the Hourly Retirement Plan:

Impact on
Pension
Expense

Impact on
Projected Benefit
Obligation(Thousands)Change in assumption:25 basis points increase in discount rate

$
-50

$
-90025 basis points decrease in discount rate


+50


+93525 basis points increase in rate of return on assets


-75


N/A25 basis points decrease in rate of return on assets


+75


N/A


The
Company sets the discount rate assumption annually for its retirement-related benefit plans at the measurement dates to reflect the yield of high-quality fixed-income
debt instruments. The expected long-term rate of return on assets is derived from a detailed periodic study conducted by the Company's actuaries and the Company's financial management. The
study includes a review of anticipated future long-term performance of individual asset categories. While the study gives appropriate consideration to recent plan performance and
historical returns, the assumption is primarily a long-term, prospective rate. The Company revised its expected long-term rate of return on assets assumption for the Hourly
Retirement Plan in 2003 to 9.5%, a reduction from its previous level of 11.0%.

At
December 31, 2002 and 2003, the asset allocations for the Hourly Retirement Plan, by asset category, are as follows:

Plan Assets at December 31,2002
Actual

2003
Actual

2004
Target %Asset Category:Equity securities

42
%
39
%
30-50
%Fixed income securities

14
%
45
%
30-50
%Cash and equivalents

42
%
15
%
5-15
%Other

2
%
1
%
0-10
%Total

100
%
100
%


With
the assets in the Hourly Retirement Plan, the Company invests primarily in market-neutral absolute-return strategies which serve to minimize volatility while providing consistent
positive returns and preserving capital. These investments include both equity and fixed income securities and may incorporate the use of options, futures and other financial instruments.
Implementation of this policy involves investments with outside managers who have expertise in these strategies.



The Company generally does not provide postretirement medical and life insurance benefits, although it subsidizes such benefits for certain employees and certain
retirees.

F-62

---

The
net periodic postretirement benefit cost included the following components:

Year Ended December 31,2001

2002

2003(Thousands)Service cost

$
123

$
116

$
129Interest cost


679


626


622Amortization of actuarial losses


64


25


27Amortization of unrecognized prior service cost


(284
)

(284
)

(284
)Net periodic postretirement benefit cost

$
582

$
483

$
494


The
following table sets forth, for the years 2002 and 2003, 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:

Year Ended December 31,2002

2003(Thousands)Change in benefit obligation:Benefit obligation at beginning of year

$
9,761

$
9,750Service cost


116


129Interest cost


626


622Participant contributions


378


365Actuarial (gains) losses


(386
)

(1,499
)Benefits paid


(745
)

(786
)Benefit obligation at end of year

$
9,750

$
8,581Change in plan assets:Fair value of plan assets at beginning of year

$


$
Employer contributions


367


421Participant contributions


378


365Benefits paid


(745
)

(786
)Fair value of plan assets at end of year

$


$
Reconciliation of funded status:Funded status

$
(9,750
)
$
(8,581
)Unrecognized prior service cost


(1,874
)

(1,590
)Unrecognized actuarial losses


1,725


199Net amount recognized in Consolidated Balance Sheets as accrued benefit cost

$
(9,899
)
$
(9,972
)


The
Company's postretirement medical and life insurance plan is unfunded. Benefits are paid from the Company's general assets as they are incurred. The Company expects to contribute
$358,000 to the

F-63

---

plan
in 2004. Information on actual and future expected benefit payments related to the postretirement medical and life insurance plan follows:

Actual benefit payments:

Thousands)2001

$
1,0232002


7452003


786Future expected benefit payments:2004

$
6692005


6632006


6622007


6532008


6502009 through 2013


3,148


For
purposes of calculating the accumulated postretirement benefit obligation, the following assumptions were made. Retirees as of December 31, 2003 who were formerly salaried
employees (with certain exceptions) were assumed to receive a Company subsidy of $400 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.

|                              |                | December 31,                                                                                                                                 | 
|----------------------------- | -------------- | -------------------------------------------------------------------------------------------------------------------------------------------- | 
|
|Weighted-average assumptions: |                |                                                                                                                                              | 
|                              | Discount rate: |                                                                                                                                              | 
|                              |                | As of January 1 (for determining net periodic postretirement benefit cost and postretirement benefit obligation for years ended December 31) | 
|                              |                | As of December 31 (for determining postretirement benefit obligation at December 31)                                                         | 

|                                      |                        | December 31,                                                                      | 
|------------------------------------- | ---------------------- | --------------------------------------------------------------------------------- | 
|
|Assumed health care cost trend rates: |                        |                                                                                   | 
|                                      | Retirees under age 65: |                                                                                   | 
|                                      |                        | Health care cost trend rate assumed for the following year                        | 
|                                      |                        | Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | 
|                                      |                        | Year that the rate reaches the ultimate trend rate                                | 
|                                      | Retirees over age 65:  |                                                                                   | 
|                                      |                        | Health care cost trend rate assumed for all years                                 | 

F-64

---

The health care cost trend rate assumption has an effect on the amounts reported. A one-percentage-point change in assumed health care cost trend rates would have the
following effects:

Year Ended December 31,2002

2003(Thousands)One-percentage-point increase:Increase in the accumulated postretirement benefit obligation as of December 31

$
4

$
8Increase in aggregate service and interest cost





One-percentage-point decrease:Decrease in the accumulated postretirement benefit obligation as of December 31


(4
)

(8
)Decrease in aggregate service and interest cost










The Company has a deferred compensation plan that permits eligible executives to defer up to 25 percent of their salary, 100 percent of bonuses and
100 percent of income from the exercise of long-term incentive units (see Note 17). Amounts deferred, through payroll deduction, are contributed by the Company to a grantor
trust, of which the Company is the grantor. The employees direct the investment of the amounts held in trust into various available funds. Distributions to participants, less any applicable tax
withholding, are made upon the termination, retirement or death of the participant. The balance in the trust of $7.0 million and $7.7 million at December 31, 2002 and 2003,
respectively, is included in "Other assets" in the Consolidated Balance Sheets, with the liability of equal amounts included in "Other liabilities." The investments held in the grantor trust are
reflected at fair value in the Consolidated Balance Sheets and are marked-to-market each period, with unrealized holding gains and losses included in the results of operations.

The
Company also provides a nonqualified defined benefit retirement plan for certain key employees. Expense recorded for this plan was $0.7, $1.0 and $0.8 million for 2001, 2002
and 2003, respectively. The liability related to this plan was $9.4 million at December 31, 2002 and 2003 and is included within "Other liabilities."

In
connection with the Company's Supplemental Executive Retirement Plan and postretirement medical and life insurance plan, the Company owns certain life insurance policies with a face
value of $111.7 million at December 31, 2003. These policies had a cash surrender value of $45.0 and $48.7 million at December 31, 2002 and 2003, respectively, and policy
loans of $43.0 and $46.6 million, respectively. The net cash surrender value at December 31, 2002 and 2003 was $2.0 and $2.1 million, respectively, and is included in "Other
assets."

Note 17.    Going Private Transaction by ISP and Stock-based Employee Compensation

On February 28, 2003, at a Special Meeting of Stockholders of ISP, a majority of the holders of the shares of ISP common stock outstanding and entitled to
vote at that meeting and a majority of the minority holders (being those shares not owned beneficially by Mr. Samuel J. Heyman, Chairman of ISP, or the officers and directors of ISP) of shares
of common stock outstanding and entitled to vote at

F-65

---

that
meeting approved the Agreement and Plan of Merger dated as of November 8, 2002 of International Specialty Products Holdings Inc. with and into ISP and pursuant to which holders of
ISP common stock received $10.30 per share in cash for each share of ISP common stock owned (except as otherwise provided in the merger agreement). Mr. Heyman formed International Specialty
Products Holdings Inc. for purposes of entering into this transaction and was deemed to be the sole "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange
Act of 1934) of all of International Specialty Products Holdings Inc.'s common stock and, at the time of the Special Meeting, approximately 81% of ISP's common stock. As a result, ISP's common
stock is no longer publicly traded and its common stock has been delisted from the New York Stock Exchange and deregistered with the Securities and Exchange Commission. Mr. Heyman may now be deemed to
beneficially own (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) 100% of ISP's common stock.

As
a result of ISP completing the going private transaction, the Company's stock-based compensation plans were terminated and payments were made in accordance with the terms of the
merger agreement. Accordingly, holders of approximately 2.7 million vested, in-the-money stock options outstanding and exercisable on February 28, 2003 received a
cash amount equal to the excess of $10.30 over the exercise price of such stock options, aggregating $1.5 million. Compensation expense of $1.5 million related to the payment for stock
option terminations was recorded in the first quarter of 2003 and is included in "Other operating gains and (charges), net" (see Note 6). In addition, outstanding restricted common stock awards
were replaced with long-term incentive units of comparable vesting and a value equivalent to the previous awards based on the buyout price of $10.30 per award.

The
total consideration for the going private transaction of approximately $138.0 million was paid out of the Company's funds. ISP borrowed a total of $94.0 million
pursuant to five loan agreements, dated March 3, 2003, with the Company's wholly owned subsidiary, ISP Investco, and its indirect, wholly owned subsidiary, ISP Ireland (see Note 13). In
addition, ISP Investco paid down $43.8 million of its intercompany payables to ISP. In accordance with the SEC's Staff Accounting Bulletin No. 54, "Application of "Push Down" Basis of
Accounting in Financial Statements of Subsidiaries Acquired by Purchase," ISP has not applied push down accounting for the going private transaction to its subsidiaries.

In
February 2000, ISP adopted the 2000 Long-Term Incentive Plan (the "2000 LTI Plan"), which authorizes the grant of incentive units ("Incentive Units") to eligible
Company employees. The 2000 LTI Plan is administered by a committee (the "Committee") appointed by the Board of Directors of ISP from among the employees of ISP. The Committee in its sole discretion
determines the number of Incentive Units to be granted to each employee. Generally, Incentive Units vest cumulatively, in 20% increments over five years, or in 10% increments every six months over
five years. Incentive Units expire on the earlier of six years after the date of grant or termination date. Upon the exercise of an Incentive Unit, the employee will receive in cash the excess, if
any, of the "Final Value" of such Incentive Units (which Final Value shall equal the value of the Incentive Units as described below as of the latest calculation date) over the value calculated on the
date of grant. The value of Incentive Units is determined at the end of each fiscal quarter based on ISP's total Stockholder's Equity (excluding accumulated other comprehensive income and losses and
goodwill impairment losses and including goodwill amortization expense in a manner similar to the periods prior to adopting SFAS No. 142). This value on the date of grant is compared to the
value as remeasured at the end of each quarter in order to determine compensation expense. The 2000 LTI Plan will terminate five years after its

F-66

---

effective
date of February 2000, unless terminated sooner by the Committee. Compensation expense related to the 2000 LTI Plan was $3.8, $2.7 and $6.6 million in 2001, 2002 and 2003,
respectively. The liability related to the 2000 LTI Plan was $7.4 and $11.6 million at December 31, 2002 and 2003, respectively, and is included in "Other liabilities."

In
May 2003, ISP adopted the 2003 Executive Long-Term Incentive Plan (the "2003 ELTI Plan"), which authorizes the grant of Incentive Units to eligible Company
employees. The 2003 ELTI Plan is administered by the Committee which, in its sole discretion, determines the number of Incentive Units to be granted to any one or more eligible employees. Incentive
Units normally vest cumulatively, in 20% increments over five years provided, however, that the Committee may in it sole discretion grant Incentive Units with any other vesting schedule. Incentive
Units expire on the earlier of ten years after the date of grant or one year after termination date. Upon the exercise of an Incentive Unit, the employee will receive in cash the excess, if any, of
the "Final Value" of such Incentive Units (which Final Value shall equal the value of the Incentive Units as described below as of the latest calculation date) over the value calculated on the date of
grant. The value of Incentive Units is determined at the end of each fiscal quarter based on ISP's total Stockholder's Equity (excluding accumulated other comprehensive income and losses). This value
on the date of grant is compared to the value as remeasured at the end of each quarter in order to determine compensation expense. The 2003 ELTI Plan will terminate ten years after its effective date
of May 15, 2003, unless terminated sooner by the Committee. Compensation expense related to the 2003 ELTI Plan was $4.8 million in 2003. The liability related to the 2003 ELTI Plan was
$4.8 million at December 31, 2003 and is included in "Other liabilities."

The
following is a summary of activity for Incentive Units related to the 2000 LTI and 2003 ELTI Plans:

Year Ended December 31,2001

2002

2003(Thousands of Incentive Units)Incentive Units outstanding, January 1

3,342

4,207

4,460Granted

1,273

796

4,152Exercised



(132
)
(391
)Forfeited

(408
)
(411
)
(366
)Incentive Units outstanding, December 31

4,207

4,460

7,855


Note 18.    Acquisitions

In May 2003, the Company acquired 100% of the stock of Germinal S.A., a supplier of food ingredients to the meat and dairy industry in southern Latin
America, for $7.3 million in cash, net of $0.4 million cash acquired. Germinal has a manufacturing facility at its headquarters in Cabreuva, Brazil. In accordance with SFAS
No. 141, "Business Combinations," the purchase price was allocated on a preliminary basis to the estimated fair value of the identifiable assets acquired, primarily property plant and
equipment, and the excess of $5.5 million was recorded as goodwill. The Company is in the process of evaluating the fair value of the net assets acquired and, therefore, the purchase price
allocation is subject to refinement. Additional payments of up to $2.7 million may be payable if certain revenue targets are achieved over the 24 months following the date of
acquisition. The results of the

F-67

---

Germinal
business are included in the Company's results of operations from the date of acquisition and did not have a material impact on the Company's results of operations for the year 2003.

In
April 2002, the Company acquired the roofing granules manufacturing operations in Ione, California of Reed Minerals, a division of Harsco Corporation. In a related transaction,
the Company also acquired the adjacent quarry operations and certain mining assets from Hanson Aggregates Mid-Pacific, Inc. The total purchase price of the acquisitions of
$11.4 million was allocated to the assets acquired. The operating results from the Ione operations are included in the Company's results from the date of acquisition and were not material to
2002 operations.

In
June 2001, the Company completed the acquisition of substantially all of the assets of FineTech Ltd. ("FineTech"), a pharmaceutical research company based in Haifa,
Israel. The acquisition was accounted for under the purchase method of accounting. Accordingly, the purchase price was allocated to the estimated fair value of the identifiable assets acquired,
including $9.5 million of intangible assets, and the excess was recorded as goodwill. The results of FineTech, including sales of $2.2 million in 2001, are included in the Company's
results from the date of its acquisition and were not material to 2001 operations. See also Note 6.

On
December 31, 2001, the Company's wholly owned subsidiary, ISP (Canada) Inc., completed the acquisition of the industrial biocides business of Degussa Corporation. The
industrial biocides business is comprised of a broad range of preservatives and fungicides for various product applications, including paints and coatings. The acquisition was accounted for under the
purchase method of accounting. Accordingly, the purchase price was allocated to the estimated fair value of the identifiable assets acquired, including $6.3 million of intangible assets, and
the excess was recorded as goodwill. A final valuation of the biocides business was completed in 2002, reflecting a reassessment of the fair values assigned to goodwill, intangible assets and
property, plant and equipment. The results of the industrial biocides business are included in the Company's results from the date of its acquisition. This business had sales of approximately
$27 million in 2001.

Note 19.    Business Segment Information

The Company is a leading multinational manufacturer of a broad spectrum of specialty and industrial chemicals and mineral products. Effective January 1,
2003, the Company changed the composition of its reportable segments to be consistent with the current structure of the Company's businesses. Over the last several years, the Company has increased its
focus on its higher margin consumer-oriented businesses. Consistent with that business focus, the Company now reports three business segments: Specialty Chemicals, Industrial Chemicals and Mineral
Products. Sales and operating income by business segment for the years 2001 and 2002 have been restated to conform to the 2003 presentation.

Specialty Chemicals.The Specialty Chemicals business segment is comprised of the personal care, pharmaceutical, food,
beverage, performance chemicals and fine chemicals product lines.

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-68

---

Pharmaceutical,
food 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, injectable prescription drugs and serums, cough syrups, antiseptics, toothpastes and denture adhesives. In the food and beverage
markets, the Company's alginates and acetylene-derived polymers serve as critical ingredients in the manufacture of numerous consumer products, including salad dressings, cheese sauces, fruit
fillings, beer and health drinks. The Company's alginates products are used as stabilizers in many well-known consumer products and prevent the separation of oil emulsions. The Company's
specialty polymers serve the beverage market by assuring the clarity and extending the shelf life of beer, wine and fruit juices.

The
performance chemicals product line includes acetylene-based polymers, vinyl ether monomers, and advanced materials for consumer, agricultural and industrial applications. The
Company's acetylene-based chemistry produces a number of performance chemicals for use in a wide range of markets including coatings, agriculture, imaging, detergents, electronics and metalworking.
The performance chemicals product line includes the biocides business acquired in December 2001, which is comprised of
a broad range of preservatives and fungicides for various product applications, including paints and coatings.

The
Company manufactures a broad range of highly specialized fine chemicals which are sold to the pharmaceutical, biotechnology, agricultural and imaging markets.

Industrial Chemicals.The Company's Industrial Chemicals business segment 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 semi-ceramic-coated colored roofing granules, algae resistant granules
and headlap granules, which are produced from rock deposits that are mined and crushed at the Company's quarries and sold primarily to the United States roofing industry for use in the manufacture of
asphalt roofing shingles.

The
following segment data are presented based on the Company's internal management reporting system for the three 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 and expense items and income
taxes 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 Specialty
Chemicals and Industrial Chemicals business segments as many of the Company's plant assets are utilized by both segments. Therefore, the following asset-related segment data are presented only for the
combined Specialty Chemicals and Industrial Chemicals business segments and for the Mineral Products business segment.

Sales
of mineral products to BMCA and its subsidiaries in 2001, 2002 and 2003 accounted for 78.6%, 77.0% and 74.7%, respectively, of the Company's net sales of mineral products,
representing

F-69

---

8.1%,
8.7% and 8.7%, respectively, of the Company's total net sales. No other customer accounted for more than 5% of the Company's total net sales in 2001, 2002 or 2003.

Year Ended December 31,2001

2002

2003(Millions)Net sales(1):Specialty Chemicals

$
552.8

$
600.8

$
623.4Industrial Chemicals


153.7


149.4


165.5Mineral Products(2)


80.7


95.1


104.0Net sales

$
787.2

$
845.3

$
892.9Operating income(1)(3):Specialty Chemicals

$
90.2

$
107.9

$
125.9Industrial Chemicals


11.3


5.9


(11.5
)Mineral Products


10.7


20.9


13.9Total segment operating income


112.2


134.7


128.3Unallocated corporate office items


1.0


0.5


0.5Write-off of deferred costs (4)





(7.6
)

Total operating income


113.2


127.6


128.8Interest expense, investment income (loss) and other expense, net


(107.4
)

(50.8
)

(63.3
)Income before income taxes and cumulative effect of changes in accounting principles

$
5.8

$
76.8

$
65.5Assets:Specialty and Industrial Chemicals

$
1,251.3

$
1,080.4

$
1,110.0Mineral Products


147.5


148.9


151.6General Corporate(5)


746.8


620.0


514.1Total assets

$
2,145.6

$
1,849.3

$
1,775.7Capital expenditures and acquisitions:Specialty and Industrial Chemicals

$
95.9

$
40.6

$
59.3Mineral Products


5.5


21.3


10.7Total

$
101.4

$
61.9

$
70.0Depreciation and amortization of goodwill and intangible assets:Specialty and Industrial Chemicals

$
59.1

$
50.1

$
52.4Mineral Products


10.7


8.2


8.8Total

$
69.8

$
58.3

$
61.2


---

F-70

---

Note 20.    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 the location of customers and reflect the Company's internal management reporting system.

F-71

---



|                                         |                             | Year Ended December 31,       
|---------------------------------------- | --------------------------- | ------------------------------
|
|
|Net sales:                               |                             |                               
|                                         | North America:              |                               
|                                         |                             | United States                 
|                                         |                             | Canada                        
|                                         |                             |                               
|                                         |                             |                               
|                                         |                             |                               
|                                         | Europe:                     |                               
|                                         |                             | Germany                       
|                                         |                             | United Kingdom                
|                                         |                             | France                        
|                                         |                             | Italy                         
|                                         |                             | Spain                         
|                                         |                             | Switzerland                   
|                                         |                             | Belgium                       
|                                         |                             | Netherlands                   
|                                         |                             | Other European countries      
|                                         |                             |                               
|                                         |                             |                               
|                                         |                             |                               
|                                         | Asia-Pacific:               |                               
|                                         |                             | Japan                         
|                                         |                             | South Korea                   
|                                         |                             | China                         
|                                         |                             | Australia                     
|                                         |                             | Taiwan                        
|                                         |                             | Other Asia-Pacific countries  
|                                         |                             |                               
|                                         |                             |                               
|                                         |                             |                               
|                                         | Latin America:              |                               
|                                         |                             | Mexico                        
|                                         |                             | Brazil                        
|                                         |                             | Other Latin American countries
|                                         |                             |                               
|                                         |                             |                               
|                                         |                             |                               
|Total net sales                          |                             | $                             
|                                         |                             |                               
|Property, plant and equipment, net:      |                             |                               
|                                         | United States               |                               
|                                         | Germany                     |                               
|                                         | United Kingdom              |                               
|                                         | All other foreign countries |                               
|                                         |                             |                               
|Total property, plant and equipment, net |                             | $                             
|                                         |                             |                               

F-72

---

Approximately 54% of the Company's sales in 2003 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 21.    Commitments and Contingencies



In January 2001, G-I Holdings filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code due to its
asbestos-related bodily injury claims relating to the inhalation of asbestos fiber ("Asbestos Claims"). Neither the Company nor the assets or operations of the Company, which was operated as a
division of a corporate predecessor of G-I Holdings 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 Claims.

ISP
has been advised by its Chairman of the Board, Samuel J. Heyman, that in 2000, three actions were commenced by creditors or potential creditors of G-I Holdings, two of
which were filed against Mr. Heyman and the third against Mr. Heyman and certain other stockholders of G-I Holdings. Two of the actions commenced in 2000 were effectively
stayed and the third was dismissed as a result of the G-I Holdings Chapter 11 filing. In September 2001, the Official Committee of Unsecured Creditors of G-I Holdings
filed a substantially similar action against Mr. Heyman. The actions allege, among other things, that the distribution by G-I Holdings of the capital stock of ISP to
Mr. Heyman and certain G-I Holdings stockholders in January 1997 was without fair consideration and a fraudulent conveyance. These actions seek, among other things, to set
aside such distribution and to require Mr. Heyman and such other stockholders to return to G-I Holdings the capital stock of ISP held by them as well as an unspecified amount of
damages. The defendants in such actions have advised ISP that they believe these actions are without merit and that the defendants intend to vigorously oppose them. However, if such actions were
successful, the plaintiffs could seek to undo such distribution, which could result in a change of control of ISP. See Note 14 for a discussion of the Senior Credit Facilities.



The 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, Resource Conservation and Recovery Act and similar state laws, in which recovery is sought for the cost of cleanup of
contaminated sites or remedial obligations are imposed, a number of which Environmental Claims are in the early stages or have been dormant for protracted periods.

The
Company estimates that its liability with respect to all Environmental Claims (including those relating to its closed Linden, New Jersey plant described below), and certain other
environmental compliance expenses, as of December 31, 2002 and 2003, was approximately $22.4 and $20.8 million, respectively. As of December 31, 2003, $13.2 million of the
liability estimate represents the present value of long-term future post closure costs discounted at a risk free rate of five percent. On an undiscounted basis, this portion of the
liability is $22.3 million. Environmental insurance recoveries are included in the Consolidated Balance Sheets at December 31, 2002 and 2003 (discussed below) of $24.0 and
$28.1 million, respectively, that relate to both past expenses and estimated future liabilities

F-73

---

("estimated
recoveries"). While the Company cannot predict whether adverse decisions or events can occur in the future, 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 increases in
remedial costs, discovery of new contamination, assertion of natural resource damages, plans for development of the Linden, New Jersey property, and 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 or decrease its estimate of insurance
recoveries in respect of those 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 that the recoveries could be in excess of
the current estimated liability for all Environmental Claims, although there can be no assurance 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 those claims.

In
June 1997, G-I Holdings 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 for which an estimate cannot currently be made. In April 1993, the 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 it cannot be certain, that, taking into account its plans for development of the site,
it can comply with the NJDEP order at a cost of approximately $13.2 million. Portions of this estimate have been calculated on a present value basis as discussed above.



The Company has a contract with a multinational supplier to supply a substantial amount of its acetylene needs to the Texas City, Texas facility. As a result of
the expiration of this contract in March 2004, the Company has taken the following actions. The Company has reduced its acetylene requirements at the Texas City plant by 50% through shifting
production of acetylene-consuming products to the Calvert City, Kentucky plant. The Company has also entered into a long-term supply contract for the remaining Texas City plant
requirements with a local producer. Under this contract, the Company is obligated to purchase specified quantities of acetylene through the end of 2013. Pricing under this contract is on a fixed basis
with escalators related to changes in the Producer Price Index.

The
Company also has an acetylene supply contract for its requirements of acetylene delivery via pipeline to its Calvert City facility. The current term of this contract expires
December 31, 2009 and allows the Company, at its sole option, to extend the agreement for two additional terms of five years

F-74

---

each.
The Company is required by the contract to pay a monthly non-cancelable facility fee. Pricing under the contract is on a fixed basis with escalators related to changes in the
Producer Price Index.

The
annual unconditional purchase obligation related to the long-term acetylene supply contract at the Texas City plant, together with the non-cancelable facility
fee associated with the Calvert City plant acetylene contract is $5.1 million.

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,
2002 and 2003 in the amount of $1.5 and $1.2 million, respectively. The Company entered into an operating lease in 1998 for a sale-leaseback transaction related to equipment at its
Freetown, Massachusetts manufacturing facility. The lease had an initial term of four years and, at the Company's option, up to three one-year renewal periods. The first two annual renewal
options were exercised during 2002 and 2003, and the third and final renewal option will be exercised during 2004. The lease provides for a substantial guaranteed payment by the Company, adjusted at
the end of each renewal period, and includes purchase and return options at fair market values determined at the inception of the lease. The Company has the right to exercise a purchase option with
respect to the leased equipment, or the equipment can be returned to the lessor and sold to a third party. If the Company does not exercise the purchase option in 2005, it will then be obligated to
pay a maximum guaranteed payment amount upon the return of the equipment. At December 31, 2003, the maximum amount due relative to the return of equipment provision was $32.6 million.
This maximum payment amount would be reduced by 50% of any proceeds from the subsequent sale of the equipment in excess of $4.8 million. This amount of $32.6 million is included in the
table below within future obligations under operating leases. In December 2003, the Company received $1.1 million in settlement of amounts due from the Polaroid bankruptcy. In accordance
with the Freetown lease agreement, the Company paid this $1.1 million to the lessor as a prepayment against future obligations under the lease. This $1.1 million prepayment is included
in "Other assets."

The
Company also has operating leases for transportation, production and data processing equipment and for various buildings and offices. Rental expense on operating leases was $17.4,
$14.3 and $12.8 million for 2001, 2002 and 2003, respectively. Future minimum lease payments for properties which were held under long-term noncancelable leases and future
obligations under unconditional purchase contracts discussed above as of December 31, 2003 were as follows:

Capital
Leases

Operating
Leases

Unconditional
Purchase
Obligations(Thousands)2004

$
494

$
9,080

$
5,8222005


277


37,541


5,2162006


9


2,268


5,3392007


9


2,032


5,4652008





1,889


5,606Later years





7,668


21,736Total minimum payments


789

$
60,478

$
49,184Less interest included above


(25
)Present value of net minimum lease payments

$
764


F-75

---



The Company has received approval from the New Jersey Turnpike Authority for a direct access ramp extension from the New Jersey Turnpike to the Company's Linden,
New Jersey property. With the planned New Jersey Turnpike access, it is likely that development alternatives such as warehousing will provide greater economic benefits than the Company's previously
considered development alternative of construction of a hazardous waste treatment, storage and disposal facility at this site. See also Note 6.

See
Note 8 for information regarding additional contingencies.

F-76

---



INTERNATIONAL SPECIALTY HOLDINGS INC.        SUPPLEMENTARY DATA (UNAUDITED)        Quarterly Financial Data (Unaudited)

|                                                                                            |  | 2002 by Quarter |        | 2003 by Quarter |  
|------------------------------------------------------------------------------------------- |  | --------------- | ------ | --------------- | -
|
|
|Net sales                                                                                   |  | $               | 219.1  |                 | $
|Cost of products sold                                                                       |  |                 | 145.4  |                 |  
|                                                                                            |  |                 |        |                 |  
|Gross profit                                                                                |  | $               | 73.7   |                 | $
|                                                                                            |  |                 |        |                 |  
|Operating income                                                                            |  | $               | 33.8   |                 | $
|                                                                                            |  |                 |        |                 |  
|Income (loss) before income taxes and cumulative effect of changes in accounting principles |  | $               | 17.0   |                 | $
|Income tax (provision) benefit                                                              |  |                 | (5.8   | )               |  
|                                                                                            |  |                 |        |                 |  
|Income (loss) before cumulative effect of changes in accounting principles                  |  |                 | 11.2   |                 |  
|Cumulative effect of changes in accounting principles, net of income tax benefit            |  |                 | (155.4 | )               |  
|                                                                                            |  |                 |        |                 |  
|Net income (loss)                                                                           |  | $               | (144.2 | )               | $
|                                                                                            |  |                 |        |                 |  

F-77

---



SCHEDULE II

INTERNATIONAL SPECIALTY HOLDINGS INC.
VALUATION AND QUALIFYING ACCOUNTS
Year Ended December 31, 2001

|Description                                                                 |                                                | Balance
January 1,
2001 |   | Charged to
Costs and
Expenses |  | Deductions |        | Balance
December 31,
2001
|--------------------------------------------------------------------------- | ---------------------------------------------- | ----------------------- | - | ----------------------------- |  | ---------- | ------ | -------------------------
|
|Valuation and Qualifying Accounts Deducted from Assets to Which They Apply: |                                                |                         |   |                               |  |            |        |                          
|                                                                            | Allowance for doubtful accounts                |                         | $ | 4,911                         |  | $          | 2,474  |                          
|                                                                            | Reserve for inventory market valuation         |                         |   | 22,313                        |  |            | 10,427 |                          
|                                                                            | Reserves for restructuring and staff reduction |                         |   | 3,613                         |  |            |       |                          

Year Ended December 31, 2002

|Description                                                                 |                                        | Balance
January 1,
2002 |   | Charged to
Costs and
Expenses |  | Deductions |       | Balance
December 31,
2002
|--------------------------------------------------------------------------- | -------------------------------------- | ----------------------- | - | ----------------------------- |  | ---------- | ----- | -------------------------
|
|Valuation and Qualifying Accounts Deducted from Assets to Which They Apply: |                                        |                         |   |                               |  |            |       |                          
|                                                                            | Allowance for doubtful accounts        |                         | $ | 5,472                         |  | $          | 657   |                          
|                                                                            | Reserve for inventory market valuation |                         |   | 28,032                        |  |            | 2,984 |                          

Year Ended December 31, 2003

|Description                                                                 |                                        | Balance
January 1,
2003 |   | Charged to
Costs and
Expenses |  | Deductions |       | Balance
December 31,
2003
|--------------------------------------------------------------------------- | -------------------------------------- | ----------------------- | - | ----------------------------- |  | ---------- | ----- | -------------------------
|
|Valuation and Qualifying Accounts Deducted from Assets to Which They Apply: |                                        |                         |   |                               |  |            |       |                          
|                                                                            | Allowance for doubtful accounts        |                         | $ | 6,022                         |  | $          | 217   |                          
|                                                                            | Reserve for inventory market valuation |                         |   | 25,184                        |  |            | 4,365 |                          

---

Notes:

S-1

---

QuickLinks