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

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Form 10-K

|ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2002

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

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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

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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 (§ 229.405 of this chapter) 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 27, 2003, 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 27, 2003, no shares of the registrant were held by non-affiliates.

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PART I

Item 1.Business

General

International Specialty Holdings Inc., formerly known as Newco Holdings Inc., is a leading multinational manufacturer of specialty chemicals and
mineral products. 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., formerly known as ISP Opco Holdings Inc., and ISP Investco LLC. ISP Chemco operates ISP's specialty chemicals business, 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 going private transaction that was completed on
February 28, 2003, ISP's common stock is no longer publicly traded and Mr. Samuel J. Heyman, the Chairman of ISP, 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 the going private transaction, ISP's common stock has been delisted from the New York Stock
Exchange and its registration with the Securities and Exchange Commission has been 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.

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.

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.

New
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 microemulsion 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 have expanded our
Singapore facility and opened a new laboratory in Brazil.

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. Through an alliance with another specialty chemical manufacturer, we were able to use our strengths in combination with our partner's proprietary technology to bring to market a
line of skin conditioners that re-hydrate the skin and provide protection from the drying effects of the sun and environment.

We
continually explore possible acquisitions through which 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.

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In
December 2001, we acquired the industrial biocides business of Creanova Inc., a subsidiary of the Degussa Corporation, which manufactures well-known
fungicides, preservatives, algaecides and biocides. This acquisition adds a new growth platform for our performance chemicals business and expands our strategic emphasis on more profitable specialty
chemicals for the coatings industry.

We
have expanded our Freetown, Massachusetts manufacturing facility's production capabilities to allow for the manufacture of some specialty chemical product lines for our personal care
business segment and to offer custom manufacturing capability to the pharmaceutical, biotechnology, agricultural and chemical process industries. In connection with the relocation of some of our
production lines for our personal care business segment 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 $150 million in upgrading our manufacturing plants with 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 plant in 1999, at the Seadrift, Texas plant in 2000 and at the Texas City plant in 2001. In addition, we shifted
butanediol production following these shutdowns to our lower cost Marl, Germany facility.

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.

Our
specialty chemicals business is organized based upon the markets for our products. Accordingly, we manage our specialty chemicals in the following three business segments:



In
each of the years ending December 31, 2000, 2001 and 2002, sales of specialty chemicals represented approximately 90% of our revenues. For information about the amount of sales
by each of our specialty chemicals business segments, see "Management's Discussion and Analysis of Financial Condition and Results of OperationsResults of Operations" and note 18
to our consolidated financial statements. Most of our specialty chemical products fall within the following categories:



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

Personal Care.Our personal care business segment markets numerous specialty chemicals that serve as critical ingredients in
the formulation of many well-known skin care, hair care, toiletry and cosmetic products. 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:



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
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

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new polymer, Aquaflex® FX-64, for use in styling products and low VOC hair sprays where it 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 markets 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.

Our
advanced materials product line includes the Ferronyl® brand of dietary iron supplement, which is marketed to the pharmaceutical industry.

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.

Performance Chemicals, Fine Chemicals and Industrial.Our performance chemicals business 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:



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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
advanced materials product line includes high-purity carbonyl iron powders, sold under the Micropowder® name, for use in the aerospace, defense, electronics
and powder metallurgy industries.

As
mentioned above, in December 2001, we acquired the industrial biocides business of Creanova Inc., a subsidiary of the Degussa Corporation. This business manufactures
well-known fungicides, preservatives, algaecides and biocides. This acquisition adds a new growth platform for our performance chemicals business and expands our strategic emphasis on more
profitable specialty chemicals for the coatings industry.

Our
fine chemicals business focuses on the production of a variety of highly specialized products sold to the pharmaceutical, biotechnology, agricultural and imaging markets. We also
offer custom manufacturing services for these industries.

In
our industrial business, we market several intermediate and solvent products, such as butanediol, tetrahydrofuran (THF) and N-methyl pyrrolidone (NMP), for use in a
variety of industries, including:



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 specialty chemicals using a worldwide marketing and sales force, typically chemists or chemical engineers, who work closely with our customers to
familiarize themselves with our customers' products, manufacturing processes and markets. We 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 facility in Wayne, New Jersey and regional offices strategically
located throughout the United States.



We conduct our international operations through 44 subsidiaries and 49 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 2000, 2001 and 2002 were approximately 50%, 52% and 51% of our total sales for those periods, respectively. For more information about
our international sales, see Note 19 to our consolidated financial statements. 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.

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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.

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 19 to our consolidated financial statements.



Because of the multi-step processes required to manufacture our specialty chemicals, we believe that our raw materials costs represent a smaller
percentage of the cost of goods sold than for most other chemical companies. We estimate that approximately one-third of our manufacturing costs are for raw materials, including energy and
packaging. As a result, we believe that fluctuations in the price of raw materials have less of an impact on our specialty chemicals business than on those chemical companies for which raw materials
costs represent a larger percentage of manufacturing costs.

The
principal raw materials used in the manufacture of our 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 three unaffiliated suppliers pursuant to supply contracts. We have a contract with a multinational supplier to supply a substantial amount of our acetylene needs to our Texas
City facility. Pricing under the contract is on a fixed basis and we are obligated to purchase a specified amount of acetylene under the contract. This supplier has announced the closure of its
facility by the end of June, 2003. As a result, we have identified several alternative sources of supply of acetylene for the Texas City location. The cost of acetylene from these sources will be
higher than that paid to the current supplier. Although we believe that these alternative sources of supply would be sufficient for our projected needs, there can be no assurance in this regard.

We
also have a contract with another supplier for the delivery of additional amounts of acetylene to our Texas City facility. We are obligated to purchase a specified amount of acetylene
under this contract, which expires June 30, 2003. We have secured an alternative source to this agreement and have entered into a five-year contract under which we are obligated to
purchase specified quantities of acetylene. Pricing is fixed with escalators tied to the Producer Price Index.

Our
third acetylene supply contract is for acetylene delivery via pipeline to our Calvert City facility. The acetylene is made from calcium carbide generation. 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 adjusted related to
changes in the Producer Price Index. The contract cannot be terminated except for cause. The supplier is obligated to

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supply as much acetylene as we need at that facility. A significantly larger supply of acetylene than we currently purchase can be obtained under the contract.

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. Under the
agreement, ISP may, at its option, cancel purchases from Degussa in favor of more competitive sourcing. Degussa, however, may not discontinue providing critical supplies or services to ISP. Pricing
for the supplies and services are negotiated periodically between the parties.

We
believe that the diversity of our acetylene supply sources and our use of a number of acetylene production technologies, including ethylene by-product, calcium carbide and
electric arc technology, provide us with a reliable supply of acetylene. In the event of a substantial interruption in the supply of acetylene from current sources, or, in the case of ISP Marl,
electricity and hydrocarbon feedstocks, we cannot assure that we would be able to obtain as much acetylene from other sources as would be necessary to meet our supply requirements. To date, we have
not experienced an interruption of our acetylene supply that has had a material adverse effect on our sales of specialty chemicals.

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.

Availability
of other raw materials, including methanol and methylamine, remained adequate during 2002. We believe that, in the event of a supply interruption, we could obtain adequate
supplies of raw materials from alternate sources.

We
use natural gas and raw materials derived from petroleum in many of our manufacturing processes and, consequently, the price and availability of natural gas and petroleum could be
material to our operations. During 2002, supplies of natural gas and petroleum remained adequate.

Mineral Products

Products and Markets.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 18 to our consolidated financial statements.

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

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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 77% of our mineral products net sales in 2002.

See
"Certain Relationships" and Note 17 to consolidated financial statements. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations- 2002
compared with 2001".

Marketing and Sales.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 three 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.We own three quarries and lease 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. Lyondell constructed a manufacturing facility in Europe capable of butanediol production that opened in the third quarter of 2002. 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.

With
regard to our mineral products, our primary competitors are the 3M Company and Reed Minerals. In April 2002, we acquired the Ione, California roofing granule manufacturing
operations of 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

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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 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 18 and 19 to our Consolidated Financial Statements
included in this Annual Report on Form 10-K.

Research and Development

Our worldwide research and development expenditures were $25.6, $25.4 and $26.0 million in 2000, 2001 and 2002, 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, and at a research center in
Piscataway, New Jersey, 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 have 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.

Patents and Trademarks

As of December 31, 2002, we owned or licensed approximately 400 domestic and 580 foreign patents or patent applications and owned or licensed approximately
155 domestic and 2,005 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 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 $5.0 million in 2000, $6.3 million in 2001, and
approximately $3.6 million in the year ended December 31, 2002, in order to comply with these laws and regulations. These expenditures are included in additions to

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property, plant and equipment. We anticipate that aggregate capital expenditures relating to environmental compliance in 2003 and 2004 will be approximately $7.0 and $6.0 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, 2002, we employed approximately 2,500 people worldwide. Approximately 730 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 Developments

On March 20, 2003, the Hercules Shareholders' Committee for New Management, which we refer to as the "Committee", notified Hercules Incorporated of its
intent to present at Hercules' 2003 Annual Meeting of Shareholders, and solicit proxies in favor of, the election of an additional slate of four directors committed to maximizing value for all
Hercules stockholders. The Committee is comprised of (i) ISP; (ii) four current members of the Hercules Board of Directors, that includes our Chairman, Samuel J. Heyman and our
President and Chief Executive Officer, Sunil Kumar; and (iii) the four nominees for the Hercules Board of Directors. On March 20, 2003, the Committee filed with the Securities and
Exchange Commission a preliminary proxy statement in connection with Hercules' Annual Meeting. ISP beneficially owns approximately 9.1% of the outstanding shares of Hercules' common stock. See
Note 21 to Consolidated Financial Statements.

Other Information

We have not established and do not maintain an internet website and consequently, we do not make our annual, quarterly and current reports and other information
that are filed with or furnished to the Securities and Exchange Commission available via an internet website. These reports are available electronically on the Securities and Exchange Commission's
EDGAR website at www.sec.gov. If you wish to receive a hard copy of our reports or any of the exhibits filed with or furnished to the Securities and Exchange Commission, they may be obtained, upon
payment of reasonable expenses, by writing to: the Corporate Secretary, International Specialty Holdings Inc., c/o ISP Management Company, Inc., 1361 Alps Road, Wayne, New Jersey 07470.

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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 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                                          |                    
|                                | Piscataway |                                                                             | Research Center*, Sales Office*                                 |                    
|                                | 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, Sao Paulo               |            | Sales Office*, Distribution Center*                                         |                                                                 | Specialty Chemicals
|Canada, Mississauga, Ontario    |            | Sales Office*, Distribution Center*                                         |                                                                 | Specialty Chemicals
|Canada, Toronto, Ontario        |            | Plant, Research Center, Sales Office, Warehouse                             |                                                                 | 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
|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 2002, we made capital expenditures in the amount of $50.5 million relating to plant, property and equipment.

11

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Item 3.Legal Proceedings

Environmental Claims and 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, 2002, is $22.4 million, before reduction for insurance recoveries reflected on our balance sheet of $24 million that relate to both past
expenses and estimated future liabilities to which we refer 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 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 our insurers and of the other parties involved at each site and their insurers, could cause us to increase our estimate of our liability in respect of 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 $13.0 million. See Item 1, "BusinessEnvironmental Services".

12

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Stockholder litigation against ISP

In July 2002, six purported class action suits were filed on behalf of ISP stockholders in the Court of Chancery of the State of Delaware against ISP and
members of its board of directors. These six suits have been consolidated. In July 2002, a seventh purported class action was filed on behalf of ISP stockholders in the United States District
Court, District of New Jersey, against ISP and members of its board of directors. The New Jersey claim was subsequently amended to assert derivative claims as well. The plaintiffs in the Delaware and
New Jersey litigations seek to represent the same class of ISP stockholders. The Delaware and New Jersey complaints allege, among other things, that the defendants have breached fiduciary and other
duties in connection with a going private transaction that was
recently completed. These complaints variously seek an award of unspecified damages and attorneys' fees, the unwinding of any transaction and other unspecified equitable relief.

In
November 2002, the parties to the stockholder litigation pending in Delaware agreed on and executed a memorandum of understanding to reflect a proposed settlement of the
Delaware litigation. The parties to the Delaware litigation also agreed, subject to the conditions described below, to enter into a settlement agreement, cooperate in public disclosures related to the
settlement and use best efforts to gain approval of the settlement by the Delaware courts. Without any admission of fault by the defendants, the memorandum of understanding contemplates a dismissal of
all claims with prejudice and a release in favor of all defendants of any and all claims related to the going private transaction, including the claims in the New Jersey litigation, that have been or
could have been asserted by the plaintiffs and all members of a plaintiff class. The memorandum of understanding further provides that the increased cash merger consideration of $.30 per share paid
pursuant to the going private transaction constituted fair, adequate and reasonable consideration for the settlement of all claims asserted or that could have been asserted. We refer to these claims
as the "settled claims".

The
proposed settlement of the Delaware litigation is subject to numerous conditions, including the completion of confirmatory discovery, execution of a settlement agreement containing a
provision permitting defendants to terminate the settlement if, prior to final court approval, any action other than the New Jersey litigation is pending in any state or federal court which raises any
settled claims, a determination by defendants prior to final court approval that the dismissal of the litigation in accordance with the settlement agreement will result in the release with prejudice
of the settled claims, final approval of the settlement by the Delaware courts and completion of the going private transaction. If the parties to the Delaware litigation do not proceed with the
proposed settlement, or in the event the proposed settlement ultimately is not approved by the Delaware courts, the Delaware and New Jersey litigations could proceed and the plaintiffs could seek the
relief sought in their complaints, including rescission of the going private transaction or an award of damages in favor of the ISP stockholders in any plaintiff class that might be certified.

We
believe that the proposed settlement of the Delaware litigation will become final, although there are no assurances in this regard, and any and all settled claims against the
defendants in the New Jersey litigation will be released and the defendants will move for a dismissal of the New Jersey litigation based on the final order in the Delaware litigation.

For
more information about legal proceedings, see Note 20 to our Consolidated Financial Statements included in this annual report.

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

None.

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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
2001 and 2002, we declared and paid dividends of $35.0 and $17.3 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 set forth on pages F-2 to F-20 and page F-51, respectively. Any decision to pay dividends, 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-21.

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-18.

Item 8.Financial Statements and Supplementary Data

See Index on page F-1 and Financial Statements and Supplementary Data on pages F-25 to F-72.

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

On June 20, 2002, we dismissed Arthur Andersen LLP as our independent public accountants and appointed KPMG LLP as our new independent public accountants.
The decision to dismiss Arthur Andersen and to retain KPMG was recommended and approved by our Board of Directors.

Arthur
Andersen's reports on our consolidated financial statements for each of the fiscal years ended December 31, 2001 and 2000 did not contain any adverse opinion or disclaimer
of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles.

During
the fiscal years ended December 31, 2001 and 2000 and the subsequent interim period through June 20, 2002, there were no disagreements between us and Arthur Andersen
on any matter of accounting principles or practices, financial statement disclosure, or auditing scope of procedure, which disagreements, if not resolved to Arthur Andersen's satisfaction, would have
caused them to make reference to the subject matter of the disagreement in connection with their report.

None
of the reportable events described in Item 304(a)(1)(v) of Regulation S-K occurred during the fiscal years ended December 31, 2001 and 2000 or
during the subsequent interim period through June 20, 2002.

We
provided Arthur Andersen with a copy of the foregoing disclosures. A copy of Arthur Andersen's letter, dated June 21, 2002, stating that they found no basis for disagreement
with such statements was attached as an exhibit to our current report on Form 8-K filed with the Commission on June 24, 2002.

14

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During
the fiscal years ended December 31, 2001 and 2000 and the subsequent interim period through June 20, 2002, we did not consult with KPMG regarding any of the matters
or events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.

PART III

Item 10.Directors and Executive Officers of the Registrant

Executive Officers of the Registrant

The following table sets forth the name, age, position and other information with respect to our directors and executive officers. Under our By-laws,
each director and executive officer continues in office until our next annual meeting of stockholders and until his or her successor is elected and qualified.

|Name and Position Held                 |  | Age |  | Present Principal Occupation
or Employment and Five-Year Employment History                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-------------------------------------- |  | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Samuel J. Heyman
Director and Chairman |  | 64  |  | 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, which position he also held from June 1996 to January 1999. He is also the Chief Executive Officer, Manager and General Partner of a number of closely held real estate development companies and
partnerships whose investments include commercial real estate and a portfolio of publicly traded securities. Mr. Heyman has served as a director of Hercules Incorporated, a global manufacturer and marketer of specialty chemicals, since May
2001.
|                                       |  |     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

15

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|Sunil Kumar
Director, President and
Chief Executive Officer                           |  | 53 |  | 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 Chief Operating Officer of BMCA and some of its subsidiaries from March 1996
to January 1999. Mr. Kumar was President, Commercial Roofing Products Division, and Vice President of BMCA from February 1995 to March 1996. 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. Mr. Kumar has served as a director of Hercules Incorporated since May 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------------------------------------------------------------------------------------- |  | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Richard A. Weinberg
Director, Executive Vice President, General Counsel and Secretary |  | 43 |  | Mr. Weinberg has been Executive Vice President, General Counsel and Secretary of IS Holdings since June 2001, and has been a director since December 2001. He has been Executive Vice President, General Counsel and Secretary of ISP Chemco and ISP since
June and May 1998 respectively and was Senior Vice President, General Counsel and Secretary of ISP and its subsidiaries from May 1996 to May 1998. He also has been a director of some of ISP's subsidiaries since May 1996 and has been director of ISP
Chemco since August 2002 and was previously a director of the same company from its formation to June 2001. 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. He also was Senior Vice President, General Counsel and Secretary of G-I Holdings from May 1996 to May 1998. Mr. Weinberg has served as a director of G-I
Holdings since May 1996. 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 since May 1998, and was Senior Vice President, General Counsel and Secretary of BMCA and its subsidiaries from May 1996 to May 1998.
|                                                                                      |  |    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

16

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|Susan B. Yoss
Executive Vice President-Finance and Treasurer               |  | 44 |  | Ms. Yoss has been Executive Vice President  Finance and Treasurer of IS Holdings since June 2001 and of ISP Chemco and ISP since September 2000. She was 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 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.
|-------------------------------------------------------------------------- |  | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Neal E. Murphy
Senior Vice President and Chief Financial Officer           |  | 46 |  | Mr. Murphy has been Senior Vice President and Chief Financial Officer of IS Holdings, ISP Chemco and ISP 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.                                                                                                                                                                                                                                                                                                                                                              
|Stephen R. Olsen
Senior Vice President-Marketing and Corporate Development |  | 40 |  | Mr. Olsen has been Senior Vice President  Marketing and Corporate Development of IS Holdings, since June 2001 and of ISP Chemco and ISP since September 2000, respectively. He was a director of ISP Chemco and some of its subsidiaries from June
2001 until December 2001. He was President and Chief Operating Officer of LL Building Products Inc., one of BMCA's subsidiaries, from June 1999 to September 2000. He was Vice President, Corporate Development and Vice President and General Manager,
Accessories and Specialty Products, of BMCA from May 1997 to October 1998.                                                                                                                                                                                                                                                                                                    
|Roger J. Cope
Senior Vice President Sales and Commercial Director, Europe  |  | 58 |  | Mr. Cope has been Senior Vice President Sales and Commercial Director Europe of IS Holdings, ISP Chemco and ISP and most of its subsidiaries since July 1999 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 and Vice President, Asia-Pacific Region of these same companies from March 1997 to July 1998.                                                                                                                                                                                                                                                                                                                                                                                                   

17

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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 2002 and the four other most highly compensated executive officers who were employed by us or our subsidiaries as of December 31, 2002.

|                    |                                 |             |      | Annual Compensation |         | Long-Term Compensation |   |         |        
|------------------- | ------------------------------- | ----------- | ---- | ------------------- | ------- | ---------------------- | - | ------- | -------
|
|Sunil Kumar         |                                 | 2002        |      | $                   | 489,260 |                        | $ | 623,295 |        
|                    | President and                   |             | 2001 |                     |         | 426,580                |   |         | 555,310
|                    | Chief Executive Officer         |             | 2000 |                     |         | 337,225                |   |         | 250,000
|Richard A. Weinberg |                                 | 2002        |      | $                   | 334,235 |                        | $ | 365,000 |        
|                    | Executive Vice                  |             | 2001 |                     |         | 321,374                |   |         | 300,000
|                    | President, General Counsel and  |             | 2000 |                     |         | 309,000                |   |         | 300,000
|                    |                                 | Secretary   |      |                     |         |                        |   |         |        
|Susan B. Yoss       |                                 | 2002        |      | $                   | 289,230 |                        | $ | 375,000 |        
|                    | Executive Vice                  |             | 2001 |                     |         | 278,100                |   |         | 325,000
|                    | President-Finance and Treasurer |             | 2000 |                     |         | 249,517                |   |         | 200,000
|Roger J. Cope       |                                 | 2002        |      | $                   | 232,780 |                        | $ | 110,000 |        
|                    | Senior Vice President           |             | 2001 |                     |         | 223,525                |   |         | 85,000 
|                    | Sales and Commercial Director-  |             | 2000 |                     |         | 214,225                |   |         | 47,000 
|                    |                                 | Europe      |      |                     |         |                        |   |         |        
|Stephen R. Olsen    |                                 | 2002        |      | $                   | 217,360 |                        | $ | 100,000 |        
|                    | Senior Vice President           |             | 2001 |                     |         | 206,000                |   |         | 85,000 
|                    | Marketing and Corporate         |             | 2000 |                     |         | 175,865                |   |         | 45,000 
|                    |                                 | Development |      |                     |         |                        |   |         |        

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18

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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, 2002. No stock options were granted to these executive officers during 2002.

Aggregated Option Exercises in 2002 and Value of ISP Common Stock Options at December 31, 2002(1)

|Name                |  | Shares Acquired
on Exercise(#) |  | Value Realized $ |        | Number of Securities Underlying
Unexercised ISP Options At
12/31/02
Exercisable/Unexercisable |                | Value of Unexercised In-the-
Money ISP Options At
12/31/02(2)
Exercisable/Unexercisable
|------------------- |  | ------------------------------ |  | ---------------- | ------ | --------------------------------------------------------------------------------------------- | -------------- | ---------------------------------------------------------------------------------------
|Sunil Kumar         |  |                               |  |                  |       |                                                                                               | 100,000/0      |                                                                                        
|Richard A. Weinberg |  |                               |  |                  |       |                                                                                               | 431,350/79,256 |                                                                                        
|Susan B. Yoss       |  |                               |  |                  |       |                                                                                               | 69,350/0       |                                                                                        
|Roger J. Cope       |  | 4,594                          |  | $                | 13,144 | (3)                                                                                           | 77,335/0       |                                                                                        
|Stephen R. Olsen    |  |                               |  |                  |       |                                                                                               | 0/0            |                                                                                        

---

19

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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 2002 under ISP's 2000
Long-Term Incentive Plan, which we refer to as the ISP 2000 LTI Plan".

Long-Term Incentive PlanAwards in 2002

|                    |  |          |   |   |  | Estimated Future Payouts Under
Non-Stock Price-Based Plans
|------------------- |  | -------- | - | - |  | ----------------------------------------------------------
|
|Sunil Kumar         |  | 75,000(5 | ) |  |  | $                                                         
|Richard A. Weinberg |  | 50,000(5 | ) |  |  | $                                                         
|Susan B. Yoss       |  | 0        |   |  |  | $                                                         
|Roger J. Cope       |  | 3,000(6  | ) |  |  | $                                                         
|Stephen R. Olsen    |  | 0        |   |  |  | $                                                         

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20

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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

As of March 27, 2003, 100% of our outstanding shares of common stock were owned of record by ISP.

The
following table sets forth information with respect to the ownership of our common stock, as of March 27, 2003, by each other person known to us to own beneficially more than
5% of either class of the common stock outstanding on that date and by all of our directors and executive officers as a group.

|Title of Class |  | Name and Address of Beneficial Owner(1)                                                               |  | Amount and
Nature of
Beneficial
Ownership |     | Percent
of Class |   | Total Voting Power |  
|-------------- |  | ----------------------------------------------------------------------------------------------------- |  | ----------------------------------------- | --- | ---------------- | - | ------------------ | -
|Common Stock   |  | Samuel J. Heyman                                                                                      |  | 100                                       | (2) | 100.0            | % | 100.0              | %
|               |  | All other directors and executive officers
of International Specialty Holdings as a
group (6 persons) |  |                                          |     |                 |   |                   |  

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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, our affiliate and to ISP. Charges by us for providing such services aggregated $6.2 million in 2002. 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

21

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BMCA's headquarters. The management agreement is expected to be amended to extend the term of the agreement, effective January 1, 2003, through December 31, 2003. Based on the services
provided by us in 2002 under the management agreement, the aggregate amount payable to us under the management agreement for 2003 is expected to be approximately $6.4 million.

Some
of our executive officers perform services for our affiliates pursuant to the management agreement, and we are indirectly 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 (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

BMCA and its subsidiaries purchase from us all of their colored roofing granules requirements under a requirements contract, except for the requirements of
certain of their roofing plants that are supplied by third parties. We continue to operate under the terms of this contract, pending negotiation and execution of a new requirements contract with BMCA
and its subsidiaries. In 2002, BMCA and its subsidiaries purchased a total of $73.2 million of mineral products from us, representing 8.7%of our
total net sales and 77% of our net sales of mineral products. Our supply arrangements with BMCA and its subsidiaries are at prices and on terms that we believe are no less favorable to it than could
be obtained from an unaffiliated third party.

22

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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 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 and bears interest at the lowest applicable federal rate for
short-term instruments. The principal amount of the loan is payable, unless ISP has previously declared the loan to be due and 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 are in the amount of $761,691
each and the last of which is for the balance of the then outstanding principal amount. If, however, Mr. Kumar remains 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. In addition, upon the occurrence of certain events, including a change of control of ISP, the
principal amount of the loan then outstanding shall be immediately forgiven. If Mr. Kumar's employment with ISP is otherwise terminated for any reason whatsoever, the entire principal balance
outstanding, together with all interest accrued, will be immediately due and payable at ISP's election.

In
January 2001, July 2001, January 2002 and July 2002, we made loans 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 bears interest at the lowest applicable federal rate, as it may be adjusted from time to time. Each loan
is due and payable in full, together with accrued interest, on demand and, in any event, not later than April 15, 2003. In accordance with ISP's going private transaction completed on
February 28, 2003, the remaining unvested shares were cancelled in exchange for the right to receive cash payments in accordance with the remaining vesting schedule.

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 a going private transaction that was completed on February 28, 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 the going private transaction, ISP's common
stock has been delisted from the New York Stock Exchange and its registration with the Securities and Exchange Commission has been terminated.

23

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Item 14.Controls and Procedures

Our
Chief Executive Officer and Chief Financial Officer are responsible for the design, maintenance and effectiveness of disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934).

We
have formed a Disclosure Controls Committee to review and revise as required, our disclosure controls and procedures. Such controls and procedures include quarterly meetings of
executives and controllers throughout IS Holdings to ensure that information required to be disclosed by us in the periodic reports we file or submit under the Exchange Act is accurate and to allow
timely decisions to be made regarding such disclosure. The effectiveness of the disclosure controls and procedures have been evaluated by the Chief Executive Officer and Chief Financial Officer within
90 days of the filing date of this report. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures are
adequate and effective.

There
have been no significant changes in internal controls or in other factors that could significantly affect these internal controls subsequent to the date of the evaluation in
connection with the preparation of this Annual Report on Form 10-K.

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")).
|               |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                           

24

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|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).                                                                 
|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 the ISP 2001 Form 10-K).                                                                                                                                                                                                                         
|10.7 |  |  |  | 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).                                                                                                                                                                                                                                                                                               
|     |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

25

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|10.8  |  |  |  | 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)).                                                                                                                                                                                                                                                                                                                                                                                   
|----- |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.9  |  |  |  | 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).
|10.10 |  |  |  | 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).                                                                                                                                                                                                                                                                                              
|10.11 |  |  |  | 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).               
|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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|*99.1 |  |  |  | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|*99.2 |  |  |  | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

---

No
reports on Form 8-K were filed in the fourth quarter of 2002.

26

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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 27, 2003

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 27, 2003, 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, Chief Financial Officer and Director (Principal Financial Officer)
|/s/KENNETH M. MCHUGHKenneth M. McHugh     |  | Vice President and Controller (Principal Accounting Officer)                             
|/s/RICHARD A. WEINBERGRichard A. Weinberg |  | Director                                                                                 

27

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CERTIFICATION

I,
Sunil Kumar, certify that:





Date:
March 27, 2003

|       |  | /s/SUNIL KUMAR                        |  | 
|------ |  | ------------------------------------- |  | 
|Name:  |  | Sunil Kumar                           |  | 
|Title: |  | President and Chief Executive Officer |  | 

28

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CERTIFICATION

I,
Neal E. Murphy, certify that:





Date:
March 27, 2003

|       |  | /s/NEAL E. MURPHY                                 |  | 
|------ |  | ------------------------------------------------- |  | 
|Name:  |  | Neal E. Murphy                                    |  | 
|Title: |  | Senior Vice President and Chief Financial Officer |  | 

29

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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-21
|Independent Auditors' Report                                                                |                                               | F-22
|Information Regarding Predecessor Independent Public Accountants' Report                    |                                               | F-24
|Consolidated Statements of Operations for the three years ended December 31, 2002           |                                               | F-25
|Consolidated Balance Sheets as of December 31, 2001 and 2002                                |                                               | F-26
|Consolidated Statements of Cash Flows for the three years ended December 31, 2002           |                                               | F-27
|Consolidated Statements of Shareholder's Equity for the three years ended December 31, 2002 |                                               | F-29
|Notes to Consolidated Financial Statements                                                  |                                               | F-31
|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

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.

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, environmental liabilities, goodwill and intangible assets, pensions
and other postemployment benefits, and contingent liabilities. We base our estimates on historical experience and on various other assumptions that are believed 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 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. If the financial condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, 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.

F-2

---



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" (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 and losses, net of income tax effect, are included in a separate
component of shareholder's equity, "Accumulated other comprehensive 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.



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 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.



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 cause us to increase our estimate of liability in respect of those matters. It is not currently possible to estimate the amount or range of any
additional liability.



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

F-3

---

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. 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 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 Statement of
Financial Accounting Standards 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 represents the goodwill associated with the reporting units included
in our performance chemicals, fine chemicals and industrial business segment and was based upon our estimate of fair value for these businesses, considering expected future cash flows and
profitability.

Year
2002 results also include an after-tax extraordinary charge of $4.7 million on the early retirement of debt. 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." Results for 2001 also
included $16.5 million of goodwill amortization, prior to the adoption of SFAS No. 142. Excluding the charges referred to above and the goodwill amortization in 2001, "income before
extraordinary item and cumulative effect of change in accounting principle" in 2002 was $55.4 million compared with $20.2 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, $5.4 million of other operating gains and charges, net, in 2002, $4.0 million
lower interest expense, and $9.2 million lower other expense, net.

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 ($31.4 million), which was acquired on December 31, 2001, and higher unit volumes in the mineral products, pharmaceutical, personal care and industrial
businesses (totaling $46.9 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, fine chemicals and personal care businesses (totaling $26.3 million) and lower volumes in the fine chemicals business ($4.4 million). On a geographic region basis, sales
increased by 10% in North America, 5% in Europe, 8% in Latin America and 3% in Asia-Pacific.

Gross
margins in 2002 declined to 34.8% from 36.4% in 2001. The reduction in gross margins resulted primarily from the lower pricing in the industrial, fine chemicals and personal care
businesses and from unfavorable results in the fine chemicals business due to the Polaroid bankruptcy in the fourth quarter of 2001. See "Liquidity and Financial Condition" for more
information about the implications of the Polaroid bankruptcy.

Operating
income in 2002 was $127.6 million compared with $113.2 million in 2001. Operating income in 2002 included $5.4 million of other operating gains and
charges, net, while operating income

F-4

---

in 2001 reflected an other operating gain of $1.6 million from an insurance claim and a $0.5 million gain from the reversal of excess restructuring reserves established in 2000. The
$5.4 million of other operating gains and charges, net, in 2002 was comprised of a gain of $5.5 million from the sale of the FineTech business, $6.8 million of gains from the
termination and settlement of contracts and $0.7 million from an insurance claim, partially offset by a $7.6 million write-off of deferred costs related to our Linden, New
Jersey property. The write-off relates 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 has become less likely with the progress made on other development opportunities at this site. See also Note 6 to consolidated financial statements.

Excluding
the other operating gains and charges, net, and $16.5 million of goodwill amortization in 2001, operating income on a comparable basis was $122.2 million in 2002,
a $5.5 million (4%) decrease versus $127.7 million in 2001. The lower comparable operating results were primarily attributable to lower pricing in the industrial and personal care
businesses (totaling $22.4 million), unfavorable volumes, pricing and mix in the fine chemicals business ($19.0 million) and higher manufacturing costs in the personal care business
($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, personal care and
mineral products businesses (totaling $20.0 million) and favorable manufacturing efficiencies in the fine chemicals, performance chemicals, mineral products and industrial businesses (totaling
$14.0 million). The weaker U.S. dollar in Europe also had a positive impact on operating income in 2002 ($8.2 million).

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.

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 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, 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.



A discussion of the operating results for each of our business segments follows. We operate our specialty chemicals business through three reportable business
segments, in addition to the mineral products segment. See Notes 18 and 19 to consolidated financial statements for additional business

F-5

---

segment and geographic information. Each business segment was favorably impacted in 2002 by the absence of goodwill amortization. Goodwill amortization in 2001 by business segment was as follows:

(Millions)Personal care

$
4.9Pharmaceutical, food and beverage


4.1Performance chemicals, fine chemicals and industrial


4.4Mineral products


3.1




Sales for the personal care business segment in 2002 were $206.2 million compared with $196.4 million in 2001. The 5% increase in sales resulted
from higher volumes in both skin care and hair care products ($11.4 million), partially offset by lower pricing ($4.1 million). Sales were also favorably impacted by the weaker U.S.
dollar in Europe ($2.5 million). The volume increase resulted from strong growth in the skin care preservative/waterproofing market. The volume growth in hair care products was driven by strong
sales in the styling gel/lotion market. The increased sales in 2002 occurred primarily in North America and Europe.

Operating
income was $35.3 million in 2002 versus $34.4 million in 2001. The $0.9 million increase reflected the favorable impact of the higher volumes
($5.4 million) and the weaker U.S. dollar in Europe ($2.2 million) as well as the elimination of goodwill amortization ($4.9 million). These favorable factors were largely offset
by lower pricing ($4.1 million), unfavorable manufacturing and inventory costs ($5.5 million) and higher operating expenses ($2.1 million).



Sales for the pharmaceutical, food and beverage business segment were $240.9 million, a $13.9 million (6%) increase over 2001 sales of
$227.0 million. The sales growth was due to $14.3 million higher sales in the pharmaceutical business resulting from higher volumes ($12.0 million) and the favorable effect of the
U.S. dollar in Europe ($2.0 million). The favorable volumes reflected strong growth in the excipients market (Plasdones for tablet binders and Polyplasdones for tablet disintegrants) and the
oral care market. Beverage sales increased by $0.7 million (2%) in 2002 due to the favorable foreign exchange effect and higher volumes. Sales of food products declined $1.1 million
(3.5%) due to lower pricing and volumes.

Operating
income increased $7.5 million (15%) to $57.4 million in 2002 from $49.9 million in 2001. The favorable effects of higher pharmaceutical volumes
($6.0 million), the weaker U.S. dollar in Europe ($2.6 million), the absence of goodwill amortization ($4.1 million) and favorable manufacturing efficiencies in the food business
($2.2 million) contributed to the increased operating income. Partially offsetting these factors was unfavorable pricing and mix ($3.2 million) and higher operating expenses
($4.8 million).



Sales for the performance chemicals, fine chemicals and industrial business segment were $303.1 million in 2002 compared with $283.1 million in
2001. The $20.0 million (7%) increase in 2002 includes the contribution to sales from the biocides business ($31.4 million) acquired at the end of

F-6

---

2001. Excluding the sales from the biocides business, sales in 2002 decreased by $11.4 million (4%), primarily reflecting $8.3 million (18%) lower fine chemicals sales.

Operating
income for this business segment was $21.1 million in 2002 compared with $17.2 million in 2001. Excluding the contribution to income from the biocides business in
2002 and other operating gains (see discussion above) of $12.9 and $1.7 million in 2002 and 2001, respectively, operating income for the segment on a comparable basis was $2.9 million in
2002 compared with $15.5 million in 2001.

Sales
for the performance chemicals business, excluding the biocides business, increased by $1.3 million (1.5%) in 2002. The higher sales were due to the favorable effect of the
weaker U.S. dollar in Europe ($1.0 million) and higher volumes ($0.3 million). Operating income for the performance chemicals business increased by $3.1 million, reflecting
favorable manufacturing efficiencies ($3.7 million), due to lower raw material costs, and the absence of goodwill amortization ($1.3 million), partially offset by higher operating
expenses ($2.3 million).

Sales
for the fine chemicals business declined by $8.3 million (18%) in 2002 principally due to lower volumes related to the loss of contract sales to Polaroid as a result of
Polaroid's bankruptcy. Higher volumes ($10.9 million) of bulk pharmaceuticals and pharmaceutical intermediates partially offset the loss of Polaroid sales. Sales of fine chemicals were also
adversely impacted by lower pricing ($3.9 million). The operating results for the fine chemicals business, excluding $12.2 million of the other operating gains, net, previously
discussed, decreased by $11.3 million in 2002, reflecting the impact of lower volumes ($7.3 million) and unfavorable pricing and mix ($11.7 million), partially offset by favorable
manufacturing efficiencies ($5.4 million), lower operating expenses ($1.8 million) and the absence of goodwill amortization ($0.4 million).

Sales
for the industrial business decreased by $4.4 million (3%) in 2002 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 ($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 business declined by $5.5 million (48%) in 2002 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 favorable effect of the weaker U.S. dollar ($2.6 million), the
absence of goodwill amortization ($2.8 million) and lower operating expenses.



Sales for the mineral products business segment were $95.1 million in 2002, a $14.5 million (18%) increase compared with sales of
$80.7 million in 2001, while operating income increased by $10.2 million in 2002 to $20.9 million compared with $10.7 million in 2001. Sales to Building Materials
Corporation of America, an affiliate, 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 reflected the impact of the
increased volumes ($3.3 million), favorable manufacturing efficiencies ($3.1 million) due to favorable fuel pricing and the absence of goodwill amortization ($3.1 million).

F-7

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Results of Operations



We recorded net income in 2001 of $3.3 million compared with $84.4 million in 2000. The lower results were attributable to investment losses of
$2.5 million in 2001 compared with investment income of $144.4 million in 2000, as well as $4.7 million in higher interest expense, partially offset by $30.9 million of
improved operating income. The results for 2001 included an after-tax charge of $0.4 million for the cumulative effect of adopting Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities." Also included in the results for 2001 are a $1.6 million other operating gain on an insurance claim and a
$0.5 million reversal of excess restructuring reserves established in 2000.

The
results for 2000 included a $14.4 million provision for restructuring and $6.1 million in other nonoperating gains from contract and insurance settlements. Excluding
the effect of such items in each year, net income for 2001 was $2.4 million compared with net income of $89.8 million in 2000.

Sales
for 2001 were $787.2 million compared with $783.9 million in 2000. The increase in sales resulted from higher volumes in the pharmaceutical and beverage, personal
care, and mineral products businesses (totaling $33.5 million) and improved pricing and mix in the industrial business
($22.4 million), offset by lower volumes in the industrial, alginates and fine chemicals businesses (totaling $45.3 million) and by the adverse effect of the stronger U.S. dollar
($10.8 million), primarily in Europe.

Operating
income for the year 2001 was $113.2 million compared with $82.3 million in 2000. Excluding nonrecurring items in each year, as discussed above, operating income
on a comparable basis for 2001 was $111.2 million, a 15% increase compared with $96.7 million in 2000. The improvement in operating income resulted primarily from higher volumes and
favorable manufacturing costs in the pharmaceutical and beverage and the fine chemicals businesses (totaling $21.7 million), and improved pricing and favorable manufacturing costs in the
industrial and mineral products businesses (totaling $41.0 million). These gains were partially offset by the impact of lower volumes in the industrial, alginates and performance chemicals
businesses (totaling $14.1 million), unfavorable manufacturing costs in the alginates and performance chemicals businesses (totaling $9.8 million) and by the adverse effect of the
stronger U.S. dollar ($6.2 million), primarily in Europe. Operating income in 2001 increased in Europe, Asia-Pacific and Latin America. Excluding the nonrecurring items in each
year, operating income decreased in the U.S. by $10.3 million in 2001.

Interest
expense for 2001 was $88.9 million, a $4.7 million (6%) increase over the $84.3 million recorded in 2000, with the increase due to higher average
borrowings, primarily reflecting the debt financing transactions discussed below in "Liquidity and Financial Condition," partially offset by the impact of lower average interest rates
($2.9 million).

Investment
losses in 2001 were $2.5 million, which included a $27.6 million write-down to fair market value of certain
available-for-sale securities which were sold shortly after the balance sheet date. Investment income in 2000 was $144.4 million and included net gains of
$123.5 million from the sale of our investments in Dexter Corporation and Life Technologies, Inc. (see Note 5 to consolidated financial statements).

F-8

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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 income and expense. Other expense, net, was $16.1 million in 2001 compared with $18.4 million in 2000. Other expense
in 2000 reflected a $2.2 million write-off of receivables from G-I Holdings Inc., a former indirect parent company, which filed a voluntary petition in
January 2001 for reorganization under Chapter 11 of the U.S. Bankruptcy Code (see Note 20 to consolidated financial statements).



A discussion of the operating results for each of our business segments follows. We operate our specialty chemicals business through three reportable business
segments, in addition to the mineral products segment. See Notes 18 and 19 to consolidated financial statements for additional business segment and geographic information. Net sales and operating
income for the years 2000 and 2001 for the three specialty chemicals business segments have been restated to conform to the 2002 presentation. In 2002, the Company realigned its alginates business
based on the markets for its products. Sales and operating income for the alginates business are now included in the personal care, pharmaceutical, food and performance chemicals businesses. Prior to
2002, the sales and operating income of the alginates business represented the food business of the pharmaceutical, food and beverage business segment.



Sales for the personal care business segment in 2001 were $196.4 million compared with $189.2 million in 2000, while operating income in 2001 was
$34.0 million compared with $33.2 million in 2000. The 4% increase in sales resulted primarily from higher volumes ($8.6 million), mainly in the North American and European hair
care markets, reflecting strong mass market sales of hair gels and styling aids, and, to a lesser extent, favorable pricing and mix ($1.9 million). These sales gains were partially offset by
lower volumes in the North American skin care market ($3.7 million), reflecting increased competition
in the sunscreen and preservative markets, and were also impacted by the adverse effect of the stronger U.S. dollar ($3.3 million), primarily in Europe.

The
increase in operating income in 2001 was attributable to the favorable volumes and pricing and to favorable manufacturing costs (totaling $9.4 million), offset by an
unfavorable mix and higher operating expenses (totaling $6.0 million) and the unfavorable effect of the stronger U.S. dollar ($2.3 million), primarily in Europe.



Sales for the pharmaceutical, food and beverage segment were $227.0 million in 2001 compared with $223.3 million in 2000. Sales for the
pharmaceutical and beverage business increased by $14.8 million (9%), reflecting volume growth ($14.7 million) across all regions and, to a lesser extent, favorable pricing and mix
($3.0 million), partially offset by the impact of the stronger U.S. dollar ($2.9 million). The sales growth in pharmaceutical and beverage was primarily the result of strong sales in the
excipients and beverage markets, partially offset by lower sales in the oral care market. Sales for the alginates food business decreased in 2001 by $11.1 million due to lower volumes
($9.9 million) and unfavorable pricing and mix ($1.2 million) across all regions due to competitive pressures.

F-9

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Operating
income for the pharmaceutical, food and beverage segment was $49.9 million in 2001 compared with $47.8 million in 2000. Operating income for the pharmaceutical
and beverage business increased 37% in 2001 due to the higher volumes and pricing and to lower manufacturing costs which reflected cost savings from lower natural gas prices. Partially offsetting
these improvements was the adverse impact of the stronger U.S. dollar ($2.2 million), primarily in Europe. Operating results for the alginates food business decreased by $11.4 million
from 2000, resulting from the lower unit volumes, unfavorable manufacturing costs related to lower production volumes and the impact of unfavorable pricing.



Sales for the performance chemicals, fine chemicals and industrial segment were $283.1 million for 2001, a decrease of $16.4 million (5%) compared
with $299.5 million in 2000, while operating income increased by $12.5 million to $17.1 million in 2001 compared with $4.6 million in 2000. Although all three businesses
experienced sales declines in 2001, the decrease in sales was principally attributable to 8% lower industrial sales.

Sales
for the performance chemicals business decreased by $2.5 million (3%) in 2001. The decline in sales resulted from lower volumes ($2.2 million) and the adverse impact
of the stronger U.S. dollar in Europe ($1.4 million), offset by favorable pricing and mix ($1.1 million). Operating results for the performance chemicals business decreased by
$9.6 million in 2001 due mainly to an unfavorable product mix and higher manufacturing costs and, to a lesser extent, the impact of the lower volumes and the stronger U.S. dollar
($2.5 million).

Sales
for the fine chemicals business decreased by $0.7 million (1.5%) in 2001, while operating income increased by $4.4 million. The lower sales reflected lower volumes
related to contract sales to Polaroid, offset by sales of $2.2 million from the FineTech business, which was acquired in the second quarter of 2001 (see Notes 6 and 10 to consolidated financial
statements), and by volume increases from other fine chemicals products ($3.5 million). The higher operating income for fine chemicals in 2001 resulted from a significantly improved gross
margin due to favorable manufacturing costs, and the favorable impact of the FineTech acquisition, partially offset by increased operating expense ($3.2 million). The gross margin in 2000 for
fine chemicals was adversely impacted by higher energy costs and lower plant utilization.

Sales
for the industrial business decreased by $13.3 million (8%) in 2001, with the decrease resulting from lower volumes ($32.5 million) and the adverse impact of the
stronger U.S. dollar in Europe ($3.1 million), partially offset by improved pricing and mix ($22.4 million). Operating income for the industrial business improved by $17.7 million
in 2001, resulting from the improved pricing and favorable manufacturing costs, reflecting favorable methanol and raw material pricing, partially offset by the impact of unfavorable volumes
($9.7 million) and the impact of the stronger U.S. dollar ($0.8 million).



Sales for the mineral products segment in 2001 were $80.7 million, an $8.8 million (12%) increase compared with sales of $71.9 million in
2000, while operating income increased by $1.3 million (14%) to $10.7 million in 2001. The higher sales resulted from a $4.7 million (38%) increase in third party sales and a
$4.1 million (7%) increase in sales to Building Materials Corporation of America, an affiliate. The higher operating income in 2001 reflected the improved volume and favorable

F-10

---

manufacturing efficiencies, partially offset by higher natural gas prices and higher operating expenses ($0.7 million) due mainly to an increased provision for doubtful accounts.

Liquidity and Financial Condition

During 2002, our net cash outflow before financing activities was $61.6 million, including $45.3 million of cash used for operations, the
reinvestment of $61.9 million for capital programs and an acquisition (see Note 10 to consolidated financial statements), $27.3 million of proceeds from the sale of the FineTech
business (see Note 6 to consolidated financial statements) and $18.3 million of cash generated from net sales of available-for-sale securities and other
short-term investments.

Cash
from operations for 2002 reflected a $255.6 million cash outflow for net purchases of trading securities. Excluding this cash outflow, cash provided from operations for 2002
totaled $210.3 million. Cash generated from a decrease in working capital totaled $21.6 million in 2002, reflecting a $15.2 million decrease in inventories, a $5.3 million
decrease in accounts receivable and a $2.3 million net increase in payables and accrued liabilities. The lower inventories resulted from our inventory reduction program that was largely
completed in the first half of 2002, while the lower receivables were primarily attributable to a settlement of receivables related to the Polaroid bankruptcy.

In
December 2001, we entered into a letter agreement to sell our pharmaceutical fine chemicals business to Pharmaceutical Resources Incorporated, which we refer to as "PRI,"
including our Haifa, Israel-based FineTech, Ltd. research facility and our Columbus, Ohio manufacturing facility. In February 2002, we received a $250,000 payment from PRI in
consideration of extending the negotiations pursuant to the letter agreement. In March 2002, we 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, we received a $3.0 million break-up fee, which was recorded as income in the first quarter of 2002 (see
Note 6 to consolidated financial statements). Following negotiations with PRI, in April 2002, we sold the Haifa-based research facility and intellectual property to PRI for
$32 million, resulting in an additional second quarter pre-tax gain, after expenses, of $5.5 million related to this sale. The net cash proceeds from the sale of the FineTech
business totaled $27.3 million.

In
April 2002, we acquired the roofing granules manufacturing operations in Ione, California of Reed Minerals, a division of Harsco Corporation. In a related transaction, we also
acquired the adjacent quarry operations and certain mining assets from Hanson Aggregates Mid-Pacific, Inc. The total purchase price of the acquisitions was $11.4 million.

Net
cash provided by financing activities in 2002 totaled $17.1 million, primarily reflecting a $125.7 million increase in short-term borrowings, partially
offset by a $95.3 million paydown of borrowings under our revolving credit facility and a $4.6 million call premium on the redemption of debt. On January 14, 2002, ISP redeemed
the remaining $307.9 million aggregate principal amount of its 9% Senior Notes due 2003, which we refer to as the "2003 Notes." 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. The redemption was funded utilizing a restricted cash escrow account which had been established in 2001 in connection with
the issuances of long-term debt discussed below. In addition, financing activities included $17.3 million of distributions to ISP, primarily to pay for fees and expenses related to
the debt financing transactions in 2001 that are discussed below. These distributions were offset by an $11.7 million capital contribution from ISP.

F-11

---

As
a result of the foregoing factors, cash and cash equivalents decreased by $42.8 million during 2002 to $35.1 million. In addition, the consolidated balance sheet
reflects $528.3 million of trading and available-for-sale securities at December 31, 2002.

As
of December 31 2002, our current maturities of long-term debt, scheduled to be repaid during 2003, 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 due 2011, which we refer to as the "2011 Notes." The net proceeds
from the issuances of the 2011 Notes were used to retire ISP's 93/4% Senior Notes due 2002 and the 2003 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 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 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 initial borrowings under which were used to repay amounts outstanding under our 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 which will terminate in five years. The revolving
credit facility includes a borrowing capacity not in excess of $50.0 million for letters of credit. As of December 31, 2002, no borrowings and $9.4 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, 2002 on borrowings under the Senior Credit Facilities was 4.7%. 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 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 on
January 14, 2002. 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

F-12

---

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, 2002, 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.

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, 2002, under the most restrictive of these limitations, we could have paid restricted payments of up to
$61.2 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.

F-13

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Our
commercial commitments as of December 31, 2002 are as follows:

Amount of Commitment Per PeriodTotal

Less than
1 Year

1-3
Years

4-5
Years

After
5 Years(Millions)Senior Credit Facilities:Term loan

$
221.6

$
2.3

$
4.5

$
161.4

$
53.4Revolving credit facility














Standby letters of credit


9.4


9.4








Lines of credit


0.1


0.1











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 2006. The
revolving credit facility includes a borrowing capacity not in excess of $50.0 million for letters of credit.

Capital
expenditures are expected to be approximately $59.0 million in 2003, primarily for maintenance and compliance expenditures.

For
information with respect to income taxes, see Note 9 to consolidated financial statements.

We
do not believe that inflation has had an 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.

On
July 8, 2002, ISP announced that its Board of Directors had received a letter from Samuel J. Heyman, ISP's Chairman of the Board, proposing that the Board consider a going
private transaction whereby holders of shares of ISP's common stock (other than those shares beneficially owned by Mr. Heyman) would receive $10 in cash per share. Such shares total
approximately 12.5 million shares, or approximately 19% of ISP's outstanding shares. ISP's Board of Directors formed a Special Committee of independent Directors to evaluate this proposal. On
November 7, 2002, ISP announced that the Special Committee and Mr. Heyman reached agreement on such transaction whereby holders of shares of ISP's common stock (other than
Mr. Heyman) would receive $10.30 in cash per share. The agreement followed a determination by the Special Committee that the transaction consideration is fair to ISP's public shareholders.

On
February 28, 2003, a Special Meeting of Stockholders of ISP was held seeking approval of the proposal. The Agreement and Plan of Merger was approved by both a majority of the
holders of the shares of common stock outstanding and entitled to vote at ISP's Special Meeting and a majority of the minority holders (being those shares not owned beneficially by Mr. Heyman
or the officers and directors of ISP) of shares of common stock outstanding and entitled to vote at ISP's Special Meeting. Subsequently, ISP's common stock is no longer publicly traded and ISP
delisted its common stock on the New York Stock Exchange and deregistered its common stock 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. The total consideration for such shares of approximately $134.4 million was paid
out of our available funds.

As
part of our acquisition of our Freetown, Massachusetts plant 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,

F-14

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and in the third quarter of 2002, the majority of Polaroid's assets were acquired by a new owner. As a result, we no longer have a long-term supply contract with Polaroid. These events
have negatively impacted the sale of our fine chemicals products and reduced the utilization of our Freetown plant.

We
have an operating lease for a sale-leaseback transaction related to equipment at the Freetown facility, which was entered into in 1998. The lease had an initial term of
four years and, at our option, up to three one-year renewal periods. The first renewal term commenced during 2002. 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. We are obligated to pay a maximum guaranteed payment amount upon the return of the equipment,
currently $35.8 million, reduced by 50% of any proceeds from the subsequent sale of the equipment in excess of $5.2 million. Under generally accepted accounting principles, we cannot
recognize this future obligation or recognize an impairment loss relative to the Freetown equipment since, as an operating lease, the Freetown equipment is not carried as a long-lived
asset on our balance sheet. However, given the current utilization of the Freetown facility as a result of the Polaroid bankruptcy, if we should exercise the purchase option at the end of any future
renewal period or at the termination of the lease in 2005, we would then perform a review for possible impairment of the Freetown assets based on the provisions of Statement of Financial Accounting
Standards No. 144, discussed below. We are working toward increasing the utilization of the Freetown plant and have transferred production of certain personal care products to this facility.

We,
together with other companies, are a party to a variety of proceedings and lawsuits involving environmental matters. See Note 20 to consolidated financial statements and Item
3, "Legal Proceedings" for further information.

We
have a contract with a multinational supplier to supply a substantial amount of our acetylene needs to our Texas City, Texas facility. This supplier generates this raw material as a
by-product from the manufacture of ethylene. Pricing under the contract is on a fixed basis and we are obligated to purchase a specified amount of acetylene under the contract. This
supplier has announced the closure of its facility by the end of June 2003. As a result, we have identified several alternative sources of supply of acetylene for the Texas City facility. The
cost of acetylene from these sources will be higher than that paid to the current supplier. Although we believe that these alternative sources of supply will be sufficient for our projected needs,
there can be no assurance in this regard.

We
also have a contract with another supplier for the delivery of additional amounts of acetylene to our Texas City facility. We are obligated to purchase a specified amount of acetylene
under this contract, which expires June 30, 2003. We have secured an alternative source to this agreement and have entered into a five-year contract under which we are obligated to
purchase specified quantities of acetylene. Pricing is fixed with escalators tied to the Producer Price Index.

F-15

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The future cost of these non-cancelable take-or-pay contracts is included in the table of contractual obligations shown below,
together with other contractual obligations related to debt and leases.

Payments Due by PeriodTotal

Less than
1 Year

1-3
Years

4-5
Years

After
5 Years(Millions)Long-term debt

$
825.7

$
2.7

$
5.3

$
161.4

$
656.3Unconditional purchase obligations


8.8


4.5


2.0


2.0


0.3Operating leases


32.2


9.7


14.2


2.2


6.1Capital lease obligations


1.3


0.6


0.7








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. Another competitor is expected to complete construction of additional capacity in Asia
during the third quarter of 2003. With the opening of these two facilities, the increase in the supply of these products to the merchant market is anticipated to result in increasing downward pressure
on pricing.

In
June 2001, the Financial Accounting Standards Board, which we refer to as "FASB," issued Statement of Financial Accounting Standards, which we refer to as "SFAS,"
No. 142, "Goodwill and Other Intangible Assets." With the adoption of SFAS No. 142, 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. We adopted SFAS No. 142
effective as of January 1, 2002 (see Note 4 to consolidated financial statements).

In
June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." 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. SFAS
No. 143 requires that the fair value of a liability for an asset retirement obligation 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 asset retirement obligation, 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, we would then recognize a gain or loss on settlement. SFAS
No. 143 is effective for fiscal years beginning after June 15, 2002. The after-tax transition charge of adopting SFAS No. 143 is expected to be less than
$2.0 million and will be recorded as the cumulative effect of a change in accounting principle, effective January 1, 2003. The on-going expense on an annual basis resulting
from the initial adoption of SFAS No. 143 is estimated to be less than $1.0 million.

In
August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 was effective as of
January 1, 2002 and addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. In accordance with
SFAS No. 144, long-lived assets, such as property, plant and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable.

F-16

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Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.

SFAS
No. 144 also establishes accounting and reporting standards for long-lived assets to be disposed of by sale and broadens the provisions of Accounting Principles
Board Opinion No. 30 for accounting for discontinued operations to include a component of an entity rather than a segment of a business. A component of an entity comprises operations and cash
flows that can be clearly distinguished from the rest of the entity. In accordance with SFAS No. 144, assets to be disposed of would be separately presented in the balance sheet and reported at
the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented
separately in the appropriate asset and liability sections of the balance sheet. While we have no current plans to do so, if we decide in the future to dispose of a component of our company that meets
the criteria of SFAS No. 144, that component would be reported as a discontinued operation. SFAS No. 144 had no impact on our consolidated financial statements in 2002.

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 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 rescission of SFAS No. 4 is effective for fiscal years beginning after May 15,
2002. SFAS No. 145 also amends SFAS No. 13 to require sale-leaseback accounting for certain lease modifications that have economic effects similar to
sale-leaseback transactions. The provisions of SFAS No. 145 related to SFAS No. 13 were effective for transactions occurring after May 15, 2002. We intend to adopt
SFAS No. 145 effective January 1, 2003, which will result in the first quarter 2002 Consolidated Statement of Operations being restated to reclassify the pre-tax
extraordinary charge of $7.1 million on the early extinguishment of debt to other expense, net.

In
June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and supercedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred, and concludes that an entity's commitment to an exit plan does not by itself create a present obligation that meets the definition of a
liability. SFAS No. 146 also establishes that fair value is the objective for initial measurement of the liability. SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. As we have no plans at this time for any exit or disposal activities, the adoption of SFAS No. 146 will not have any immediate effect on our
consolidated financial statements.

In
December 2002, the 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 transition for an entity that voluntarily changes to the fair value method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends disclosure requirements of SFAS No. 123 by requiring disclosure in the "Summary
of Significant Accounting Policies" (see Note 2 to consolidated financial statements) of the method usedeither the intrinsic value method or the fair value methodto
account for stock-based

F-17

---

employee compensation and 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 are required for fiscal years ending after December 15, 2002. We have disclosed the information required by SFAS No. 148 in Note 2 to consolidated financial
statements. As discussed above, our parent, ISP, completed a going private transaction in the first quarter of 2003. As a result, our stock-based employee compensation plans were terminated, and the
provisions of SFAS No. 148 will no longer be applicable to us.

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 is 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 above, ISP Chemco's 2011 Notes are guaranteed by all of ISP Chemco's domestic subsidiaries, other than
certain immaterial subsidiaries and our accounts receivable financing subsidiary.

In
January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities." 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 created after January 31, 2003 shall apply the provisions of FIN 46 immediately. A public entity with a variable interest in a
variable interest entity created before February 1, 2003 shall apply the provisions of FIN 46 to that entity no later than the beginning of the first interim or annual reporting period
beginning after June 15, 2003. We do not have an interest in a variable interest entity. Therefore, FIN 46 will not have an impact on our consolidated financial statements.



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

F-18

---

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 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, 2001 |       | December 31, 2002 |  
|--------------------------------------- |  | ----------------- | ----- | ----------------- | -
|
|
|Interest rate financial instruments     |  | $                 | 100.0 |                   | $
|Foreign currency financial instruments. |  |                   | 17.7  |                   |  
|Equity-related financial instruments    |  |                   | 19.7  |                   |  

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, 2001 and 2002, the U.S. dollar equivalent notional value of outstanding forward foreign exchange contracts was $17.7 and $10.0 million, respectively. All
foreign exchange contracts outstanding as of December 31, 2001 and 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, 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, 2001 and 2002, the value of equity-related long contracts was $12.7 and $3.9 million, respectively, and the value of equity-related short contracts was
$7.2 and $0.4 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, 2001 and 2002 was $243,000 and $(145,000), respectively, and the unrealized gains on equity-related short contracts
were $45,000 and $6,000, respectively.

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

F-19

---

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. 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.

*    *    *

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-20

---



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, extraordinary item and cumulative effect of change in accounting principle |                         |  
|                | Income from continuing operations before extraordinary item and cumulative effect of change in accounting principle               |                         |  
|                | Net income (loss)                                                                                                                 |                         |  
|Other Data:     |                                                                                                                                   |                         |  
|                | Depreciation                                                                                                                      |                         | $
|                | Amortization of goodwill and intangibles                                                                                          |                         |  
|                | Capital expenditures and acquisitions                                                                                             |                         |  

|                    |                                        | December 31,
|------------------- | -------------------------------------- | ------------
|
|
|Balance Sheet Data: |                                        |             
|                    | Total working capital                  |             
|                    | Total assets                           |             
|                    | Long-term debt less current maturities |             
|                    | Shareholder's equity                   |             

F-21

---



INDEPENDENT AUDITORS' REPORT

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

We
have audited the accompanying consolidated balance sheet of International Specialty Holdings Inc. and subsidiaries as of December 31, 2002, and the related consolidated
statements of operations, shareholder's equity, and cash flows for the year then ended, as listed in the accompanying index. In connection with our audit of the 2002 consolidated financial statements,
we also have audited the 2002 consolidated financial statement schedule as listed in the accompanying index. 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 audit.
The 2000 and 2001 consolidated financial statements of International Specialty Holdings Inc. and subsidiaries as listed in the accompanying index 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 4 and
before the restatement described in Note 18 to the consolidated financial statements, in their report dated February 27, 2002.

We
conducted our audit 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 audit provides a reasonable basis for our opinion.

In
our opinion, the 2002 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 the results of their operations and their cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the related 2002 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 Note 4 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.

F-22

---

As
discussed above, the 2000 and 2001 consolidated financial statements of International Specialty Holdings Inc. and subsidiaries as listed in the accompanying index were audited
by other auditors who have ceased operations. As described in Note 4, 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 18, the Company changed the composition of its reportable segments in 2002, and the amounts in the 2000 and 2001 consolidated financial statements relating to reportable segments
have been restated to conform to the 2002 composition of reportable segments. We audited the adjustments that were applied to restate the disclosures for reportable segments reflected in the 2000 and
2001 consolidated financial statements. In our opinion, such transitional disclosures for 2000 and 2001 in Note 4 are appropriate and such segment adjustments in Note 18 are appropriate
and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2000 and 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 2000 and 2001 consolidated financial statements taken as a whole.



Short
Hills, New Jersey

February 14,
2003, except as
        to the first paragraph of Note 21, which is as of
        February 28, 2003 and the second paragraph of Note 21,
        which is as of March 20, 2003

F-23

---



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 2000 and 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 2002 composition of reportable segments. The Andersen report refers to the consolidated balance sheet as of December 31, 2000 and the consolidated statements of income,
shareholder's equity and cash flows for the year ended December 31, 1999, 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-24

---



INTERNATIONAL SPECIALTY HOLDINGS INC.    CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                                                       |  | Year Ended December 31, |         
|------------------------------------------------------------------------------------------------------ |  | ----------------------- | --------
|
|
|Net sales                                                                                              |  | $                       | 783,941 
|Cost of products sold                                                                                  |  |                         | (514,599
|Selling, general and administrative                                                                    |  |                         | (156,571
|(Provision) benefit for restructuring                                                                  |  |                         | (14,429 
|Other operating gains and charges, net                                                                 |  |                         |        
|Amortization of goodwill and intangibles                                                               |  |                         | (16,042 
|                                                                                                       |  |                         |         
|Operating income                                                                                       |  |                         | 82,300  
|Interest expense                                                                                       |  |                         | (84,250 
|Investment income (loss), net                                                                          |  |                         | 144,356 
|Other nonoperating gains                                                                               |  |                         | 6,106   
|Other expense, net                                                                                     |  |                         | (18,398 
|                                                                                                       |  |                         |         
|Income before income taxes, extraordinary item and cumulative effect of change in accounting principle |  |                         | 130,114 
|Income taxes                                                                                           |  |                         | (45,673 
|                                                                                                       |  |                         |         
|Income before extraordinary item and cumulative effect of change in accounting principle               |  |                         | 84,441  
|Extraordinary itemloss on early retirement of debt, net of income tax benefit of $2,434               |  |                         |        
|Cumulative effect of change in accounting principle, net of income tax benefit of $216 in 2001         |  |                         |        
|                                                                                                       |  |                         |         
|Net income (loss)                                                                                      |  | $                       | 84,441  
|                                                                                                       |  |                         |         

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

F-25

---



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                                                                |                            |          
|                                                      | Other short-term investments                                                                                |                            |          
|                                                      | Restricted cash                                                                                             |                            |          
|                                                      | Accounts receivable, trade, less allowance of $5,472 and $6,022 at December 31, 2001 and 2002, respectively |                            |          
|                                                      | Accounts receivable, other                                                                                  |                            |          
|                                                      | Inventories                                                                                                 |                            |          
|                                                      | Deferred income tax assets                                                                                  |                            |          
|                                                      | Prepaid expenses                                                                                            |                            |          
|                                                      |                                                                                                             |                            |          
|                                                      |                                                                                                             | Total Current Assets       |          
|Property, plant and equipment, net                    |                                                                                                             |                            | 556,959  
|Goodwill, net of accumulated amortization of $180,486 |                                                                                                             |                            | 497,402  
|Intangible assets                                     |                                                                                                             |                            | 15,167   
|Other assets                                          |                                                                                                             |                            | 62,481   
|                                                      |                                                                                                             |                            |          
|Total Assets                                          |                                                                                                             | $                          | 2,145,594
|                                                      |                                                                                                             |                            |          
|LIABILITIES AND SHAREHOLDER'S EQUITY                  |                                                                                                             |                            |          
|Current Liabilities:                                  |                                                                                                             |                            |          
|                                                      | Short-term debt                                                                                             |                            | $        
|                                                      | Current maturities of long-term debt                                                                        |                            |          
|                                                      | Accounts payable                                                                                            |                            |          
|                                                      | Accrued liabilities                                                                                         |                            |          
|                                                      | Payable to related parties, net                                                                             |                            |          
|                                                      | Income taxes payable                                                                                        |                            |          
|                                                      |                                                                                                             |                            |          
|                                                      |                                                                                                             | Total Current Liabilities  |          
|                                                      |                                                                                                             |                            |          
|Long-term debt less current maturities                |                                                                                                             |                            | 919,557  
|                                                      |                                                                                                             |                            |          
|Deferred income taxes                                 |                                                                                                             |                            | 59,321   
|                                                      |                                                                                                             |                            |          
|Other liabilities                                     |                                                                                                             |                            | 115,456  
|                                                      |                                                                                                             |                            |          
|Commitments and Contingencies                         |                                                                                                             |                            |          
|Shareholder's Equity:                                 |                                                                                                             |                            |          
|                                                      | Common stock, $.001 par value per share; 1,000 shares issued and outstanding                                |                            |          
|                                                      | Additional paid-in capital                                                                                  |                            |          
|                                                      | Accumulated deficit                                                                                         |                            |          
|                                                      | Accumulated other comprehensive loss                                                                        |                            |          
|                                                      |                                                                                                             |                            |          
|                                                      |                                                                                                             | Total Shareholder's Equity |          
|                                                      |                                                                                                             |                            |          
|Total Liabilities and Shareholder's Equity            |                                                                                                             | $                          | 2,145,594
|                                                      |                                                                                                             |                            |          

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

F-26

---



INTERNATIONAL SPECIALTY HOLDINGS INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                    |                                                                                                    | Year Ended December 31,                                                  |        
|--------------------------------------------------- | -------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | -------
|
|
|Cash and cash equivalents, beginning of year        |                                                                                                    | $                                                                        | 21,324 
|                                                    |                                                                                                    |                                                                          |        
|Cash provided by (used in) operating activities:    |                                                                                                    |                                                                          |        
|                                                    | Net income (loss)                                                                                  |                                                                          |        
|                                                    | Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |                                                                          |        
|                                                    |                                                                                                    | Extraordinary item                                                       |        
|                                                    |                                                                                                    | Cumulative effect of change in accounting principle                      |        
|                                                    |                                                                                                    | Gain on sale of assets                                                   |        
|                                                    |                                                                                                    | Write-off of deferred costs                                              |        
|                                                    |                                                                                                    | Provision (benefit) for restructuring                                    |        
|                                                    |                                                                                                    | Depreciation                                                             |        
|                                                    |                                                                                                    | Amortization of goodwill and intangibles                                 |        
|                                                    |                                                                                                    | 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                                                           |                                                                          |        
|                                                    | Other (increase) decrease in property, plant and equipment                                         |                                                                          |        
|                                                    | Change in receivable from/payable to related parties                                               |                                                                          |        
|                                                    | Change in cumulative translation adjustment                                                        |                                                                          |        
|                                                    | Other, net                                                                                         |                                                                          |        
|                                                    |                                                                                                    |                                                                          |        
|Net cash provided by (used in) operating activities |                                                                                                    |                                                                          | 46,082 
|                                                    |                                                                                                    |                                                                          |        
|Cash used in 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 used in investing activities               |                                                                                                    |                                                                          | (51,193
|                                                    |                                                                                                    |                                                                          |        
|Cash provided by (used in) 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                                                                 |                                                                          |        
|                                                    | Borrowings (repayments) with 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 |                                                                                                    |                                                                          | (1,592 
|                                                    |                                                                                                    |                                                                          |        
|Effect of exchange rate changes on cash             |                                                                                                    |                                                                          | 142    
|                                                    |                                                                                                    |                                                                          |        
|Net change in cash and cash equivalents             |                                                                                                    |                                                                          | (6,561 
|                                                    |                                                                                                    |                                                                          |        
|Cash and cash equivalents, end of year              |                                                                                                    | $                                                                        | 14,763 
|                                                    |                                                                                                    |                                                                          |        

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

F-27

---

|                                                                   |                                                                                | Year Ended December 31,                                              |  
|------------------------------------------------------------------ | ------------------------------------------------------------------------------ | -------------------------------------------------------------------- | -
|
|
|Supplemental Cash Flow Information:                                |                                                                                |                                                                      |  
|Effect on cash from (increase) decrease in working capital items*: |                                                                                |                                                                      |  
|                                                                   | Accounts receivable                                                            |                                                                      | $
|                                                                   | Inventories                                                                    |                                                                      |  
|                                                                   | 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                                                            |                                                                      |  
|                                                                   |                                                                                |                                                                      |  

---

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

F-28

---



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, 1999                                     |                                                            | $                                                                                                        | 476,228 |                                               | $ | (8,087              | ) | $                           |       
|                                                               | Comprehensive income, year ended December 31, 2000:        |                                                                                                          |         |                                               |   |                     |   |                             |        
|                                                               |                                                            | Net income                                                                                               |         |                                               |  |                     |   |                            |        
|                                                               |                                                            |                                                                                                          |         |                                               |   |                     |   |                             |        
|                                                               |                                                            | Other comprehensive income, net of tax:                                                                  |         |                                               |   |                     |   |                             |        
|                                                               |                                                            | Unrealized holding gains, net of income taxes of $68,174                                                 |         |                                               |  |                     |   | 137,065                     |        
|                                                               |                                                            | Less: Reclassification adjustment for gains included in net income, net of income taxes of $52,364       |         |                                               |  |                     |   | 108,851                     |        
|                                                               |                                                            |                                                                                                          |         |                                               |   |                     |   |                             |        
|                                                               |                                                            | Unrealized gains on available-for-sale securities                                                        |         |                                               |  |                     |   | 28,214                      |        
|                                                               |                                                            | Translation adjustment                                                                                   |         |                                               |  |                     |   | (8,126                      | )      
|                                                               |                                                            |                                                                                                          |         |                                               |   |                     |   |                             |        
|                                                               | Comprehensive income                                       |                                                                                                          |         |                                               |   |                     |   |                             |        
|                                                               |                                                            |                                                                                                          |         |                                               |   |                     |   |                             |        
|                                                               | Dividends and distributions to parent company              |                                                                                                          |         |                                              |   |                     |  |                             |        
|                                                               | Capital contribution from parent company                   |                                                                                                          |         | 92,684                                        |   |                     |  |                             |        
|                                                               |                                                            |                                                                                                          |         |                                               |   |                     |   |                             |        
|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                     | )      
|                                                               |                                                            |                                                                                                          |         |                                               |   |                     |   |                             |        
|                                                               |                                                            | 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  | )                                             |   |                    |   |                             | (25,943
|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     |                                               |   |                    |   |                             |       
|                                                               |                                                            |                                                                                                          |         |                                               |   |                     |   |                             |        

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

F-29

---



|                           |                                                                | Common Stock
and Additional
Paid-In Capital                                                            |         | Accumulated
Other
Comprehensive
Income (Loss) |   | Accumulated
Deficit |   | Comprehensive
Income (Loss) |         
|-------------------------- | -------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ------- | --------------------------------------------- | - | ------------------- | - | --------------------------- | --------
|
|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-30

---



INTERNATIONAL SPECIALTY HOLDINGS INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Formation of the Company, Merger of International Specialty Products Inc. into ISP Holdings Inc. and Corporate Restructuring

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"). In the Merger, each outstanding share of Old ISP's common stock, other than those
held by ISP Holdings, was converted into one share of common stock of ISP, and the outstanding shares of Old ISP's common stock which were held by ISP Holdings were converted into an aggregate of
53,833,333 shares (or approximately 78%) of the outstanding shares of common stock of 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 specialty chemicals business. 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 specialty chemicals business.

The
Company is engaged principally in the manufacture and sale of a wide range of specialty chemicals and mineral products. See Notes 18 and 19 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; and assets and obligations related to
employee benefits. Actual results could differ from those estimates. In the

F-31

---

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 has a policy to review the recoverability of long-lived assets and identify and measure any potential impairments. The Company does not
anticipate any changes in management estimates that would have a material impact on operations, liquidity or capital resources.



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 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 financial instruments.

|                                        |  | December 31, 2001 |       | December 31, 2002 |  
|--------------------------------------- |  | ----------------- | ----- | ----------------- | -
|
|
|Interest rate financial instruments     |  | $                 | 100.0 |                   | $
|Foreign currency financial instruments. |  |                   | 17.7  |                   |  
|Equity-related financial instruments    |  |                   | 19.7  |                   |  



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 loss," and amounted to $(32.4) and $(13.2) million as of December 31, 2001 and
2002, 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.

"Other
short-term investments" are investments in limited partnerships which are accounted for by the equity method. Gains and losses are reflected in other expense, net.
Liquidation of partnership interests generally require a 30 to 45 day notice period.

F-32

---



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 $751,000, $355,000 and
$157,000 for 2000, 2001 and 2002, respectively. See Note 3 for a discussion of a new accounting standard, Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets."



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.



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 on the Company's 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, 2001 and 2002, the U.S. dollar equivalent notional value of outstanding forward foreign exchange contracts was $17.7 and $10.0 million, respectively. All
foreign exchange contracts outstanding as of December 31, 2001 and 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.

F-33

---

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.



In 1998, the Financial Accounting Standards Board (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 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. Foreign
exchange forward contracts are held to offset exposure to changes in exchange rates affecting intercompany loans.

F-34

---



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 loss," and amounted to $(27.7)
and $(10.1) million as of December 31, 2001 and 2002, respectively. Exchange gains and 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 $(1.7), $(4.2) and $2.2 million in 2000, 2001 and 2002,
respectively.



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 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 also Notes 3 and
4.



The Company's intangible assets at December 31, 2002 were acquired in the acquisition of the Company's biocides business as of December 31, 2001
(see Note 10). 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 Note 3 for a discussion of SFAS No. 144). 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.



For sales of specialty chemicals products, revenue is primarily recognized at the time products are shipped to the customer. Products are primarily shipped Free
on Board, or "FOB," shipping point and title and risk of loss passes to the customer at the time of shipment. Normal terms for sales of specialty chemicals are 30 days net. There are no special
conditions for sales that occur through third party distributors.

For
sales of mineral products, revenue is recognized at the time products are shipped to the customer. Products are shipped FOB shipping point and title and risk of loss passes to the
customer at the time of shipment. 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.

F-35

---



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 9).



Shipping and handling costs included in "Selling, general and administrative" expenses amounted to $30.3, $29.1 and $31.2 million for 2000, 2001 and 2002,
respectively.



Debt issuance costs are amortized to expense over the life of the related debt. Unamortized debt issuance costs of $21.3 and $17.7 million are included in
"Other assets" in the Consolidated Balance Sheets at December 31, 2001 and 2002, respectively.



Research and development costs are charged to operations as incurred and amounted to $25.6, $25.4 and $26.0 million for 2000, 2001 and 2002, respectively.
Such amounts are classified as "Selling, general and administrative" expenses in the accompanying Consolidated Statements of Operations.



The Company has elected the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," and applies Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock-based employee compensation plans. For stock options granted
pursuant to ISP's stock option plans for which the exercise price equaled the fair market value on the date of grant, the Company used the intrinsic value method to account for compensation expense.
For options granted for which the exercise price was less than the fair market value on the date of grant, compensation expense was recorded over the vesting period for the difference between the
exercise price and the fair value on the date of grant. See also Notes 16 and 21.

If
the Company had elected to recognize compensation cost based on the fair value of awards under ISP's stock option plans at grant dates, the Company's pro forma net income (loss) for
the years

F-36

---

2000, 2001 and 2002 would have been $82.1, $1.8 and $(105.6) million, respectively. A reconciliation of net income (loss), as reported, and pro forma net income (loss) using the fair value method
follows:

|                                                                               |  | Year Ended December 31, |     
|------------------------------------------------------------------------------ |  | ----------------------- | ----
|
|
|Net income (loss), as reported(1)                                              |  | $                       | 84.4
|Less: Stock-based compensation cost using fair value method, net of tax effect |  |                         | (2.3
|                                                                               |  |                         |     
|Pro forma net income (loss) using fair value method                            |  | $                       | 82.1
|                                                                               |  |                         |     

---

The
fair value of ISP's stock options used to compute pro forma net income is the estimated present value at the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions: risk-free interest rate of 6%; expected life of 6 years; expected volatility of 56% for options granted in 2002 and 24% for options granted
prior to 2002; and dividend yield of 0%.



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, 2001
and 2002, was $26.6 and $22.4 million, respectively, before reduction for insurance recoveries reflected on its Consolidated Balance Sheets of $21.7 and $24.0 million, respectively. The
Company's liability is reflected on an undiscounted basis. The gross environmental liability is included within "Accrued liabilities" and "Other liabilities," and the estimated recoveries are included
within "Other assets." See Note 20 for further discussion with respect to environmental liabilities and estimated insurance recoveries.



Comprehensive income (loss) includes net income (loss), unrealized gains and losses from investments in available-for-sale securities, net
of income tax effect, unrealized gains and losses from derivative hedging instruments, net of income tax effect, 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

---



Note 2. Summary of Significant Accounting Policies (Continued)

Changes
in the components of "Accumulated other comprehensive income (loss)" for the years 2000, 2001 and 2002 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, 1999 |  | $                                                           | 5,806   |                                                     | $ |                                                   |   | $                                               | (13,893 | )                                             | $
|Change for the year 2000   |  |                                                             | 28,214  |                                                     |   |                                                   |   |                                                 | (8,126  | )                                             |  
|                           |  |                                                             |         |                                                     |   |                                                    |   |                                                 |         |                                               |  
|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 | )                                             | $
|                           |  |                                                             |         |                                                     |   |                                                    |   |                                                 |         |                                               |  



Certain amounts in the 2000 and 2001 Consolidated Financial Statements have been reclassified to conform to the 2002 presentation.

Note 3. New Accounting Standards

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." With the adoption of SFAS No. 142, 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. The Company adopted SFAS No. 142 effective as of January 1, 2002 (see Note 4).

In
June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." 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. SFAS
No. 143 requires that the fair value of a liability for an asset retirement obligation 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 asset retirement obligation, 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.
SFAS No. 143 is effective for fiscal years beginning after June 15, 2002.

In
August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 was effective as of
January 1, 2002 and addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. In accordance with
SFAS No. 144, long-lived assets, such as property, plant and equipment,

F-38

---

and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.

SFAS
No. 144 also establishes accounting and reporting standards for long-lived assets to be disposed of by sale and broadens the provisions of Accounting Principles
Board Opinion No. 30 for accounting for discontinued operations to include a component of an entity rather than a segment of a business. A component of an entity comprises operations and cash
flows that can be clearly distinguished from the rest of the entity. In accordance with SFAS No. 144, assets to be disposed of would be separately presented in the balance sheet and reported at
the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented
separately in the appropriate asset and liability sections of the balance sheet. While the Company has no current plans to do so, if it decides in the future to dispose of a component of the Company
that meets the criteria of SFAS No. 144, that component would be reported
as a discontinued operation. SFAS No. 144 had no impact on the Company's Consolidated Financial Statements in 2002.

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 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 rescission of SFAS No. 4 is effective for fiscal years beginning after May 15,
2002. SFAS No. 145 also amends SFAS No. 13 to require sale-leaseback accounting for certain lease modifications that have economic effects similar to
sale-leaseback transactions. The provisions of SFAS No. 145 related to SFAS No. 13 were effective for transactions occurring after May 15, 2002. The Company intends to
adopt SFAS No. 145 effective January 1, 2003, which will result in the first quarter 2002 Consolidated Statement of Operations being restated to reclassify the pre-tax
extraordinary charge of $7.1 million on the early extinguishment of debt to other expense, net.

In
June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and supercedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred, and concludes that an entity's commitment to an exit plan does not by itself create a present obligation that meets the definition of a
liability. This Statement also establishes that fair value is the objective for initial measurement of the liability. SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. As the Company has no plans at this time for any exit or disposal activities, the adoption of SFAS No. 146 will not have any immediate effect on the
Company's Consolidated Financial Statements.

F-39

---

In
December 2002, the 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 transition for an entity that voluntarily changes to the fair value method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends disclosure requirements of SFAS No. 123 by requiring disclosure in the "Summary of Significant Accounting Policies" (see
Note 2) of the method usedeither the intrinsic value method or the fair value methodto account for stock-based employee compensation and 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 are required for fiscal years ending after
December 15, 2002. The Company has disclosed the information required by SFAS No. 148 in Note 2. See Note 21 for a subsequent event affecting the Company's stock-based
compensation plans.

In
November 2002, the FASB issued FASB Interpretation No. ("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 are 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
January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities." 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 created after January 31, 2003 shall apply the provisions of FIN 46 immediately. A public entity with a variable interest in a
variable interest entity created before February 1, 2003 shall apply the provisions of FIN 46 to that entity no later than the beginning of the first interim or annual reporting period
beginning after June 15, 2003. The Company does not have an interest in a variable interest entity. Therefore, FIN 46 will not have an impact on the Company's Consolidated Financial Statements.

F-40

---

Note 4. Goodwill and Intangible Assets

The Company adopted SFAS No. 142 effective as of January 1, 2002. In accordance with the provisions of SFAS No. 142 (see Note 3),
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 represents the goodwill associated with the
reporting units included in the Company's Performance Chemicals, Fine Chemicals and Industrial business segment.

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 test for impairment was conducted in the fourth quarter of 2002 based upon the September 29, 2002 balance sheet. This test did not result in any additional
impairment charge.

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

|                                                                                                      |  | Year Ended December 31, |        
|----------------------------------------------------------------------------------------------------- |  | ----------------------- | -------
|
|
|Income before extraordinary item and cumulative effect of change in accounting principle, as reported |  | $                       | 84,441 
|Add back: goodwill amortization                                                                       |  |                         | 16,042 
|                                                                                                      |  |                         |        
|Adjusted income before extraordinary item and cumulative effect of change in accounting principle     |  | $                       | 100,483
|                                                                                                      |  |                         |        
|Net income (loss), as reported                                                                        |  | $                       | 84,441 
|Add back: goodwill amortization                                                                       |  |                         | 16,042 
|                                                                                                      |  |                         |        
|Adjusted net income (loss)                                                                            |  | $                       | 100,483
|                                                                                                      |  |                         |        

F-41

---

The
changes in the carrying amount of goodwill for each of the Company's business segments for the year ended December 31, 2002 are as follows.

|                                                                                   |  | Personal Care |         | Pharmaceutical,
Food and
Beverage |   | Performance
Chemicals,
Fine
Chemicals
and
Industrial |  | Mineral
Products |          | Total
Goodwill |  
|---------------------------------------------------------------------------------- |  | ------------- | ------- | --------------------------------- | - | ---------------------------------------------------- |  | ---------------- | -------- | -------------- | -
|
|Balance, January 1, 2002                                                           |  | $             | 120,022 |                                   | $ | 154,145                                              |  | $                | 171,696  |                | $
|Impairment loss                                                                    |  |               |        |                                   |   |                                                     |  |                  | (155,400 | )              |  
|Purchase accounting adjustment related to the acquisition of the biocides business |  |               |        |                                   |   |                                                     |  |                  | (1,170   | )              |  
|Goodwill reduction related to the sale of FineTech                                 |  |               |        |                                   |   |                                                     |  |                  | (15,126  | )              |  
|                                                                                   |  |               |         |                                   |   |                                                      |  |                  |          |                |  
|Balance, December 31, 2002                                                         |  | $             | 120,022 |                                   | $ | 154,145                                              |  | $                |         |                | $
|                                                                                   |  |               |         |                                   |   |                                                      |  |                  |          |                |  

The
purchase accounting adjustment of $1.2 million 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.

Intangible
assets at December 31, 2001 included $6.3 million related to the biocides business which was acquired on December 31, 2001 and $8.9 million related
to the FineTech business which was acquired in June 2001 (see Note 10). The portion of the FineTech business acquired in June 2001 was sold in April 2002 (see
Note 6) and the intangible assets related to this business were included in the determination of the gain from such sale. Following is information as of December 31, 2001 and 2002
related to the Company's acquired intangible assets:

|                                  |                        |                                     |            | December 31, 2001 |        | December 31, 2002 |      
|--------------------------------- | ---------------------- | ----------------------------------- | ---------- | ----------------- | ------ | ----------------- | -----
|
|
|Amortized intangible assets:      |                        |                                     |            |                   |        |                   |      
|FineTech:                         |                        |                                     |            |                   |        |                   |      
|                                  | Intellectual property  |                                     | 20 years   |                   | $      | 6,000             |      
|                                  | Non-compete agreements |                                     | 5 years    |                   |        | 3,500             |      
|                                  |                        |                                     |            |                   |        |                   |      
|                                  |                        | Total FineTech                      |            |                   |        |                   | 9,500
|                                  |                        |                                     |            |                   |        |                   |      
|Biocides business:                |                        |                                     |            |                   |        |                   |      
|                                  | Patents                |                                     | 5-20 years |                   |        | 3,750             |      
|                                  | Non-compete agreements |                                     | 2-5 years  |                   |        | 1,000             |      
|                                  | EPA registrations      |                                     | 5 years    |                   |        |                  |      
|                                  |                        |                                     |            |                   |        |                   |      
|                                  |                        | Total biocides                      |            |                   |        |                   | 4,750
|                                  |                        |                                     |            |                   |        |                   |      
|Total amortized intangible assets |                        |                                     |            |                   | 14,250 |                   |      
|                                  |                        |                                     |            |                   |        |                   |      
|Unamortized intangible assets:    |                        |                                     |            |                   |        |                   |      
|Biocides business:                |                        |                                     |            |                   |        |                   |      
|                                  | Trademarks             |                                     |            |                   |        | 1,500             |      
|                                  | EPA registrations      |                                     |            |                   |        |                  |      
|                                  |                        |                                     |            |                   |        |                   |      
|                                  |                        | Total unamortized intangible assets |            |                   |        |                   | 1,500
|                                  |                        |                                     |            |                   |        |                   |      
|Total intangible assets           |                        |                                     |            | $                 | 15,750 |                   | $    
|                                  |                        |                                     |            |                   |        |                   |      

F-42

---

(Thousands)Aggregate amortization expense:Year ended December 31, 2001

$
583Year ended December 31, 2002


824Estimated amortization expense:Year ended December 31,2003

$
5752004


2902005


2902006


2902007


26


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

Investment income (loss), net, totaled $144.4, $(2.5) and $48.1 million in 2000, 2001 and 2002, respectively. Investment income in 2000 included net
realized gains, after expenses, of $123.5 million related to the sale of the Company's investments in Dexter Corporation and Life Technologies, Inc. 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                                           |                       |                         |       
|Realized and unrealized gains (losses), net, on trading securities and other short-term investments |                       |                         | (10,658
|Interest and dividend income                                                                        |                       |                         | 4,551  
|Investment-related expenses                                                                         |                       |                         | (10,752
|                                                                                                    |                       |                         |        
|Investment income (loss), net                                                                       |                       | $                       | 144,356
|                                                                                                    |                       |                         |        

F-43

---

Included
in "Accumulated other comprehensive loss" at December 31, 2001 and 2002 are unrealized holding gains and losses on available-for-sale securities,
as follows:

December 31,2001

2002(Thousands)Equity securities:Equity securities with net gains

$
44

$
2,674Equity securities with net losses


(50,940
)

(22,248
)Total equity securities


(50,896
)

(19,574
)Corporate debt securities with net gains


908


Total unrealized pre-tax losses


(49,988
)

(19,574
)Tax effect


17,545


6,374Unrealized losses on available-for-sale securities

$
(32,443
)
$
(13,200
)


The
total market value of available-for-sale securities at December 31, 2002, comprised solely of equity securities, was $274.6 million. Included in
available-for-sale securities at December 31, 2002 is an $87.1 million investment (based on market value) in Hercules Incorporated ("Hercules"). Such investment
represented approximately 9.1% of the outstanding common stock of Hercules at December 31, 2002.

As
of December 31, 2001 and 2002, the market value of the Company's equity securities held long was $288.7 and $525.1 million, respectively, and the Company had $57.5 and
$286.2 million, respectively, of short positions in common stocks, based on market value. 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 to achieve its 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. 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.

As
of December 31, 2001 and 2002, the value of equity-related long contracts was $12.7 and $3.9 million, respectively, and the value of equity-related short contracts was
$7.2 and $0.4 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, 2001 and 2002 was $243,000 and $(145,000), respectively, and the unrealized gains on equity-related short contracts
were $45,000 and $6,000, respectively. The market values referred to above are based on quotations as reported by various stock exchanges and major broker/dealers.

F-44

---



Note 6. Other Operating Gains and Charges, Net, and Nonoperating Gains

Other operating gains and charges, net, in 2001 and 2002 are comprised of the following:

Year Ended December 31,2001

2002(Thousands)Write-off of deferred costs

$


$
(7,567
)Gain on sale of assets





5,468Gain on contract termination





2,832Gain on contract settlement





3,928Gain on insurance claim


1,600


716Other operating gains and charges, net

$
1,600

$
5,377


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 net book value at December 31, 2002 of the remaining Linden assets
held for future use was $16.1 million, primarily the cost of the land.

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 $3.25 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 million. The Company recorded an additional second quarter
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.

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.

In
2000, the Company received $3.5 million from the settlement of a pre-1997 contract termination dispute relating to the Company's Mineral Products segment. Also in
2000, the Company received a $2.6 million insurance settlement related to environmental insurance litigation. The total gains of

F-45

---

$6.1 million were recorded as other nonoperating gains in 2000. Such gains were recorded as nonoperating since they were not related to the current operations of the Company.

Note 7. (Provision) Benefit for Restructuring

As part of a 1998 restructuring program, the Company wrote down to fair value the butanediol production assets at its Texas City and Seadrift, Texas manufacturing
facilities. In December 2000, the Company shut down production at the Seadrift facility and shut down production of butanediol at the Texas City facility in the first quarter of 2001.
Accordingly, the Company recorded a one-time restructuring charge against operating income in 2000 of $2.5 million, as detailed below. Also, in connection with the relocation of
certain of the Company's production lines for personal care products to the Company's Freetown, Massachusetts facility, the Company shut down its manufacturing operation in Belleville, New Jersey in
the first quarter of 2001. Accordingly, the Company recorded a restructuring charge against operating income in 2000 of $11.9 million, as detailed below.

The
components of the $14.4 million provision for restructuring in 2000 are as follows:

|                                            |  | Belleville |      | Texas City/
Seadrift
|------------------------------------------- |  | ---------- | ---- | --------------------
|
|Write-off of production assets              |  | $          | 10.4 |                     
|Accrual for severance costs                 |  |            | 0.9  |                     
|Accrual for decommissioning and remediation |  |            |     |                     
|Accrual for other related costs             |  |            | 0.6  |                     
|                                            |  |            |      |                     
|Total provision                             |  | $          | 11.9 |                     
|                                            |  |            |      |                     

Of
the total $14.4 million restructuring provision, $3.6 million represented cash costs to be incurred, including severance costs of $0.9 million in connection with
the termination of 33 plant management, supervisors and operators at the Belleville plant and severance costs of $0.7 million in connection with the termination of 10 supervisors and operators
at the Texas City and Seadrift plants.

In
2001, $1.1 million of severance and other payments were charged against the Belleville reserve and $0.4 million of this reserve was reversed, representing an excess
severance reserve and reserve for other related costs. This program was completed in the fourth quarter of 2001. In 2001, $2.0 million of severance and other payments were charged against the
Texas City/Seadrift reserve and $0.1 million of this reserve was reversed, representing an excess severance reserve. This program was completed in the fourth quarter of 2001.

Note 8. 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,

F-46

---

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)                               |  | $                       | (1,691 
|Financing costs on sale of accounts receivable (see Note 11)  |  |                         | (2,342 
|Environmental provision relating to discontinued operations   |  |                         | (2,662 
|Write-off of receivables from G-I Holdings Inc. (see Note 20) |  |                         | (2,193 
|Legal fees and related costs                                  |  |                         | (2,553 
|Miscellaneous other nonoperating expenses                     |  |                         | (6,957 
|                                                              |  |                         |        
|Other expense, net                                            |  | $                       | (18,398
|                                                              |  |                         |        

Note 9. Income Taxes

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

|                                                                                                       |  | Year Ended December 31,
|------------------------------------------------------------------------------------------------------ |  | -----------------------
|
|
|United States                                                                                          |  | $                      
|Foreign                                                                                                |  |                        
|                                                                                                       |  |                        
|Income before income taxes, extraordinary item and cumulative effect of change in accounting principle |  | $                      
|                                                                                                       |  |                        

Income
tax (provision) benefit consists of the following:

|                     |          | Year Ended December 31, |        
|-------------------- | -------- | ----------------------- | -------
|
|
|Federal:             |          |                         |        
|                     | Current  |                         | $      
|                     | Deferred |                         |        
|                     |          |                         |        
|                     |          | Total Federal           |        
|                     |          |                         |        
|Foreign:             |          |                         |        
|                     | Current  |                         |        
|                     | Deferred |                         |        
|                     |          |                         |        
|                     |          | Total foreign           |        
|                     |          |                         |        
|State and local:     |          |                         |        
|                     | Current  |                         |        
|                     | Deferred |                         |        
|                     |          |                         |        
|                     |          | Total state and local   |        
|                     |          |                         |        
|Income tax provision |          | $                       | (45,673
|                     |          |                         |        

F-47

---

The
differences between the income tax provision computed by applying the statutory Federal income tax rate to income before income taxes, extraordinary item and
cumulative effect of change in accounting principle, and the income tax provision reflected in the Consolidated Statements of Operations are as follows:

|                        |                                                | Year Ended December 31, |        
|----------------------- | ---------------------------------------------- | ----------------------- | -------
|
|
|Statutory tax provision |                                                | $                       | (45,540
|Impact of:              |                                                |                         |        
|                        | Foreign operations                             |                         |        
|                        | State and local taxes, net of Federal benefits |                         |        
|                        | Extraterritorial income exclusion benefit      |                         |        
|                        | Nondeductible goodwill amortization            |                         |        
|                        | Percentage depletion                           |                         |        
|                        | Other, net                                     |                         |        
|                        |                                                |                         |        
|Income tax provision    |                                                | $                       | (45,673
|                        |                                                |                         |        

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

December 31,2001

2002(Thousands)Deferred tax liabilities related to:Property, plant and equipment

$
108,187

$
120,581Other


13,091


2,206Total deferred tax liabilities


121,278


122,787Deferred tax assets related to:Expenses not yet deducted for tax purposes


(30,774
)

(29,935
)Mark-to-market adjustments


(27,780
)

(14,589
)Other


(36,332
)

(42,272
)Total deferred tax assets


(94,886
)

(86,796
)Net deferred tax liability


26,392


35,991Deferred tax assets reclassified to current assets


32,929


34,687Noncurrent deferred tax liability

$
59,321

$
70,678


Although
realization is not assured, the Company believes that it is more likely than not that all of its deferred tax assets will be realized.

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 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

F-48

---

"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 the consolidated group that included G-I
Holdings Inc. (the "G-I Holdings Group"). Until January 1, 1997, ISP and its domestic subsidiaries were included in the consolidated Federal income tax returns 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 remains
obligated, however, with respect to tax liabilities imposed or that may be imposed for periods prior to such date. Among other things, those tax sharing agreements provide for the sharing of the
G-I Holdings Group's consolidated tax liability based on each member's share of the tax as if such member filed on a separate basis. Accordingly, a payment of tax would be made to
G-I Holdings equal to ISP's allocable share of the G-I Holdings Group's consolidated tax liability.

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. G-I Holdings has advised the Company that it believes that it will prevail in the tax matter
arising out of 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. On September 21, 2001, the IRS filed a proof of claim with respect to such deficiency against G-I Holdings in the
G-I Holdings

F-49

---

bankruptcy. If such 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 an amount of approximately $270 million. On May 7, 2002, G-I Holdings filed an objection to that proof of claim. 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. See Note 20.

Note 10. Acquisitions

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.

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.

Note 11. 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, 2001 and 2002, the cash made available to the Company for the sale of receivables was $27.1 and $31.4 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 and is included in
other expense, net, and amounted to $2.3, $1.9 and $1.0 million in 2000, 2001 and 2002, respectively.

F-50

---



Note 12. Inventories

Inventories are comprised of the following:

December 31,2001

2002(Thousands)Finished goods

$
120,797

$
113,912Work-in-process


36,960


32,407Raw materials and supplies


32,825


29,898Inventories

$
190,582

$
176,217


At
December 31, 2001 and 2002, $60.1 and $62.0 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 $3.7 and $2.8 million higher at December 31, 2001 and December 31, 2002, respectively.

Note 13. Property, Plant and Equipment

Property, plant and equipment is comprised of the following:

December 31,2001

2002(Thousands)Land and land improvements

$
80,594

$
83,459Buildings and building equipment


111,347


122,970Machinery and equipment


683,142


743,537Construction in progress


45,592


32,765Total


920,675


982,731Less accumulated depreciation


(363,716
)

(417,018
)Property, plant and equipment, net

$
556,959

$
565,713


See
Note 20 for information regarding capital leases.

Note 14. Long-term Debt and Lines of Credit

Long-term debt is comprised of the following:

December 31,2001

2002(Thousands)9% Senior Notes due October 2003

$
307,858

$
Senior Credit Facilities:Term loan maturing in June 2008


223,875


221,625Revolving credit facility


95,250


101/4% Senior Subordinated Notes due 2011


402,536


402,796105/8% Senior Secured Notes due 2009


200,000


200,000Obligations under capital leases (Note 20)


271


1,319Other


32


Total long-term debt


1,229,822


825,740Less current maturities


(310,265
)

(2,732
)Long-term debt less current maturities

$
919,557

$
823,008


F-51

---

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, 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 were 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 an extraordinary
loss on the early retirement of debt of $4.7 million ($7.1 million before income tax benefit of $2.4 million). The extraordinary loss 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 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 five years. The revolving credit facility
includes a borrowing capacity not in excess of $50.0 million for letters of credit. As of December 31, 2002, no borrowings and $9.4 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, 2002
on borrowings under the Senior Credit Facilities was 4.7%. 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

F-52

---

credit facility. Commitment fees totaling $0.4 and $1.1 million are included in interest expense for 2001 and 2002, 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, 2002, 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 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, 2002, 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, 2002, under the most restrictive of these limitations, the Company could have paid dividends and
other restricted payments of up to $61.2 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,

F-53

---

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.

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 2003 Notes as of December 31, 2001 was $312.5 million. The estimated fair value of the 2009 Notes as of December 31, 2001
and 2002 was $200.3 and $177.5 million, respectively, and the estimated fair value of the 2011 Notes as of December 31, 2001 and 2002 was $418.6 and $413.9 million, respectively.

The
aggregate maturities of long-term debt as of December 31, 2002 for the next five years are as follows:

(Thousands)2003

$
2,7322004


2,8432005


2,5042006


54,5622007


106,875


In
the above table, maturities for each of the years 2003 through 2005 include $2.3 million of maturities relating to the term loan under the Senior Credit Facilities. Maturities
in 2006 and 2007 include $54.0 and $106.9 million, respectively, relating to such term loan.

At
December 31, 2002, the Company's foreign subsidiaries had total available short-term lines of credit aggregating $4.0 million, of which $3.9 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, 2001 were not significant.

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-54

---

formed on January 1, 2000. The actual results of ISP Investco prior to its formation in June 2001 are included in the results of ISP Chemco.

Year Ended December 31,2000

2001

2002(Millions)Interest expense

$
(13.9
)
$
(8.4
)
$
(2.9
)Investment income (loss)


144.4


(2.5
)

48.1Miscellaneous other income (expense)


(0.2
)

(0.9
)

0.3


Note 15. 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 (any portion of which can
be contributed, at the participants' option, in the form of ISP's common stocksee also Note 21), 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 $7.7, $7.3 and $7.6 million
for 2000, 2001 and 2002, 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 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                                   |  |                        | 1,811  |              
|Expected return on plan assets                  |  |                        | (2,633 | )            
|Amortization of actuarial losses                |  |                        | 40     |              
|Amortization of unrecognized prior service cost |  |                        | 190    |              
|                                                |  |                        |        |              
|Net periodic pension cost (income)              |  | $                      | (345   | )            
|                                                |  |                        |        |              

F-55

---

The
following tables set forth, for the years 2001 and 2002, 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 Marl Plan:

|                                                                                       |                                                | Hourly Retirement Plan |       | ISP Marl Plan |  
|-------------------------------------------------------------------------------------- | ---------------------------------------------- | ---------------------- | ----- | ------------- | -
|
|
|
|Change in benefit obligation:                                                          |                                                |                        |       |               |  
|                                                                                       | Benefit obligation at beginning of year        |                        | $     | 25,406        |  
|                                                                                       | Service cost                                   |                        |       | 247           |  
|                                                                                       | Interest cost                                  |                        |       | 1,932         |  
|                                                                                       | Plan amendments                                |                        |       |              |  
|                                                                                       | Plan settlement                                |                        |       |              |  
|                                                                                       | Effect of changes in exchange rates            |                        |       |              |  
|                                                                                       | Actuarial losses (gains)                       |                        |       | 1,707         |  
|                                                                                       | Benefits paid                                  |                        |       | (1,416        | )
|                                                                                       |                                                |                        |       |               |  
|                                                                                       | Benefit obligation at end of year              |                        | $     | 27,876        |  
|                                                                                       |                                                |                        |       |               |  
|Change in plan assets:                                                                 |                                                |                        |       |               |  
|                                                                                       | Fair value of plan assets at beginning of year |                        | $     | 28,132        |  
|                                                                                       | Actual return on plan assets                   |                        |       | 2,467         |  
|                                                                                       | Employer contributions                         |                        |       | 1,308         |  
|                                                                                       | Benefits paid                                  |                        |       | (1,416        | )
|                                                                                       |                                                |                        |       |               |  
|                                                                                       | Fair value of plan assets at end of year       |                        | $     | 30,491        |  
|                                                                                       |                                                |                        |       |               |  
|Reconciliation of funded status:                                                       |                                                |                        |       |               |  
|                                                                                       | Funded status                                  |                        | $     | 2,615         |  
|                                                                                       | Transition obligation                          |                        |       |              |  
|                                                                                       | Unrecognized prior service cost                |                        |       | 919           |  
|                                                                                       | Unrecognized actuarial (gains) losses          |                        |       | 4,587         |  
|                                                                                       |                                                |                        |       |               |  
|Net amount recognized in Consolidated Balance Sheets as (accrued) prepaid benefit cost |                                                | $                      | 8,121 |               | $
|                                                                                       |                                                |                        |       |               |  
|Amounts recognized in Consolidated Balance Sheets:                                     |                                                |                        |       |               |  
|                                                                                       | (Accrued) prepaid benefit cost                 |                        | $     | 8,121         |  
|                                                                                       | Accrued minimum pension liability              |                        |       |              |  
|                                                                                       | Intangible asset                               |                        |       |              |  
|                                                                                       | Accumulated other comprehensive loss           |                        |       |              |  
|                                                                                       |                                                |                        |       |               |  
|Net amount recognized in Consolidated Balance Sheets as (accrued) prepaid benefit cost |                                                | $                      | 8,121 |               | $
|                                                                                       |                                                |                        |       |               |  

In
determining the projected benefit obligation, the weighted-average assumed discount rate was 7.25% and 6.75% for 2001 and 2002, respectively, for the Hourly Retirement Plan, and was
6.5% for

F-56

---

each year for the ISP Marl Plan. The expected long-term rate of return on assets, used in determining net periodic pension cost (income) for the Hourly Retirement Plan, was 11% for 2001
and 2002 and was 7% for each year for the ISP Marl Plan. The Company has revised the expected long-term rate of return for the Hourly Retirement Plan to 9.5% for 2003.

The
Company also provides a nonqualified defined benefit retirement plan for certain key employees. Expense recorded for this plan was $1.2, $0.7 and $1.0 million for 2000, 2001
and 2002, respectively. The liability related to this plan was $9.1 and $9.4 million as of December 31, 2001 and 2002, respectively, 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 $108.1 million at December 31, 2002. These policies had a cash surrender value of $41.4 and $45.0 million at December 31, 2001 and 2002, respectively, and policy
loans of $39.7 and $43.0 million, respectively. The net cash surrender value at December 31, 2001 and 2002 was $1.7 and $2.0 million, respectively, and is included in "Other
assets."



The Company generally does not provide postretirement medical and life insurance benefits, although it subsidizes such benefits for certain employees and certain
retirees. Such subsidies were reduced as of January 1, 2000.

The
net periodic postretirement benefit cost included the following components:

Year Ended December 31,2000

2001

2002(Thousands)Service cost

$
109

$
123

$
116Interest cost


576


679


626Amortization of actuarial losses





64


25Amortization of unrecognized prior service cost


(284
)

(284
)

(284
)Net periodic postretirement benefit cost

$
401

$
582

$
483


F-57

---

The
following table sets forth, for the years 2001 and 2002, 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:

|                                         |                                                | December 31,                                                                 |  
|---------------------------------------- | ---------------------------------------------- | ---------------------------------------------------------------------------- | -
|
|
|Change in benefit obligation:            |                                                |                                                                              |  
|                                         | Benefit obligation at beginning of year        |                                                                              | $
|                                         | Service cost                                   |                                                                              |  
|                                         | Interest cost                                  |                                                                              |  
|                                         | Participant contributions                      |                                                                              |  
|                                         | Actuarial (gains) losses                       |                                                                              |  
|                                         | Benefits paid                                  |                                                                              |  
|                                         |                                                |                                                                              |  
|                                         | Benefit obligation at end of year              |                                                                              | $
|                                         |                                                |                                                                              |  
|Change in plan assets:                   |                                                |                                                                              |  
|                                         | Fair value of plan assets at beginning of year |                                                                              | $
|                                         | Employer contributions                         |                                                                              |  
|                                         | Participant contributions                      |                                                                              |  
|                                         | Benefits paid                                  |                                                                              |  
|                                         |                                                |                                                                              |  
|Fair value of plan assets at end of year |                                                | $                                                                            | 
|                                         |                                                |                                                                              |  
|Reconciliation of funded status:         |                                                |                                                                              |  
|                                         | Funded status                                  |                                                                              | $
|                                         | Unrecognized prior service cost                |                                                                              |  
|                                         | Unrecognized actuarial losses                  |                                                                              |  
|                                         |                                                |                                                                              |  
|                                         |                                                | Net amount recognized in Consolidated Balance Sheets as accrued benefit cost |  
|                                         |                                                |                                                                              |  

For
purposes of calculating the accumulated postretirement benefit obligation, the following assumptions were made. Retirees as of December 31, 2002 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. Subject to such lifetime maximum, a 9% annual rate
of increase in the Company's per capita cost of providing postretirement medical benefits was assumed for 2002 for such retirees under age 65. To the extent that the lifetime maximum benefits have not
been reached, the foregoing rate was assumed to decrease gradually to an ultimate rate of 5% by the year 2011 and remain at that level thereafter. For retirees over age 65, a 9% annual rate of
increase was assumed for all years. The weighted-average assumed discount rate used in determining the accumulated postretirement benefit obligation was 7.25% and 6.75% for 2001 and 2002,
respectively.

The
health care cost trend rate assumption has an effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rates by one percentage point in each year
would increase the accumulated postretirement benefit obligation as of December 31, 2001 and 2002 by $25,000 and $4,000, respectively, and the aggregate of the service and interest cost
components of the

F-58

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net periodic postretirement benefit cost for the years 2001 and 2002 by $2,000 and $0, respectively. A decrease of one percentage point in each year would decrease the accumulated postretirement
benefit obligation as of December 31, 2001 and 2002 by $22,000 and $4,000, respectively, and the aggregate of the service and interest cost components of the net periodic postretirement benefit
cost for the years 2001 and 2002 by $2,000 and $0, respectively.

Note 16. Stock Option and Award Plans, Long-Term Incentive Plan and Stock Appreciation Rights

See
Note 21 for a subsequent event affecting the Company's stock-based compensation plans.

ISP's
1991 Incentive Plan for Key Employees and Directors, as amended (the "1991 Plan"), authorized the grant of options to purchase a maximum of 13,000,000 shares of ISP's common stock.
The
Compensation Committee of ISP's Board of Directors (the "Committee") determined the exercise price and vesting schedule of options granted under the 1991 Plan. In 1995 through 1999, ISP granted
options to certain employees to purchase an aggregate of 3,217,020 shares of ISP's common stock at exercise prices ranging from $.625 to $5.625 below the fair market value of such shares on the date
of grant. The difference between the exercise price and the fair market value of such shares on the date of grant was recognized as compensation expense over the vesting period of 21/2
to 5 years. Compensation expense for such options was $0.5, $0.6 and $0.1 million in 2000, 2001 and 2002, respectively. All other employee options granted under the 1991 Plan have a term
of nine years, have an exercise price equal to the fair market value of such shares on the date of grant and become exercisable at a rate determined by the Committee at the time of grant. Special
vesting rules apply to options granted to non-employee directors. The 1991 Plan expired in accordance with its terms in June 2000, and no additional options will be granted under
the 1991 Plan.

Effective
July 1, 2000, ISP adopted the 2000 Stock Option Plan for Non-Employee Directors (the "2000 Plan"), which was approved by ISP's stockholders in
May 2001. The 2000 Plan authorizes the grant of options to purchase a maximum of 200,000 shares of ISP's common stock. Under the 2000 Plan, each non-employee director is granted a
non-qualified stock option to purchase 5,000 shares of ISP's common stock (the "Initial Option") on the date such person becomes an eligible director and an additional
non-qualified option to purchase 3,000 shares of ISP's common stock (an "Additional Option") on each anniversary of the date of grant of the Initial Option. The term of each option granted
is nine years. Initial Options are subject to a three-year vesting period, commencing on the first anniversary of the date of grant, and Additional Options are subject to a
one-year vesting period, becoming exercisable in full on the first anniversary of the date of grant. The exercise price of the options is equal to the fair market value of such shares on
the date of grant. During 2000, 2001 and 2002, ISP granted 15,000, 19,000 and 12,000 options, respectively, pursuant to the 2000 Plan, of which 40,000 options were outstanding at December 31,
2002.

F-59

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The
following is a summary of transactions pertaining to the Plans:

|                                 |  | Year Ended
December 31, 2000 |   | Year Ended
December 31, 2001 |       | Year Ended
December 31, 2002
|-------------------------------- |  | ---------------------------- | - | ---------------------------- | ----- | ----------------------------
|
|Outstanding, January 1           |  | 8,028                        |   | $                            | 10.93 |                             
|Granted                          |  | 20                           |   |                              | 6.12  |                             
|Exercised                        |  | (87                          | ) |                              | 6.40  |                             
|Exchanged for Incentive Units    |  | (2,033                       | ) |                              | 10.94 |                             
|Forfeited                        |  | (1,303                       | ) |                              | 11.62 |                             
|                                 |  |                              |   |                              |       |                             
|Outstanding, December 31         |  | 4,625                        |   |                              | 10.50 |                             
|                                 |  |                              |   |                              |       |                             
|Options exercisable, December 31 |  | 2,669                        |   |                              | 10.24 |                             
|                                 |  |                              |   |                              |       |                             

Based
on calculations using the Black-Scholes option-pricing model, the weighted-average fair value of options granted in 2000, 2001 and 2002 under the Plans for which the exercise price
equaled the fair market value of such shares on the date of grant was $1.81, $4.06 and $6.44 per share, respectively.

The
following is a summary of the status of stock options outstanding and exercisable under the Plans as of December 31, 2002:

|                 |  | Stock Options Outstanding |  | Stock Options
Exercisable
|---------------- |  | ------------------------- |  | -------------------------
|
|$3.781  $5.875  |  | 221                       |  | $                        
|$5.876  $8.938  |  | 498                       |  |                          
|$8.939  $10.30  |  | 1,058                     |  |                          
|$10.31  $18.625 |  | 1,328                     |  |                          
|                 |  |                           |  |                          
|Total            |  | 3,105                     |  |                          
|                 |  |                           |  |                          

F-60

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Note 16. Stock Option and Award Plans, Long-Term Incentive Plan and Stock Appreciation Rights (Continued)

In February 2000, ISP adopted the 2000 Long-Term Incentive Plan (the "LTI Plan"), which authorizes the grant of incentive units ("Incentive
Units") to eligible Company employees. The LTI Plan is administered by the Committee, which 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 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 Stockholders' 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) divided by ISP's total common shares outstanding. 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 LTI Plan will terminate five years after its effective date of February 2000, unless terminated sooner by the Committee.

In
2000, employees exchanged an aggregate of 2,032,994 stock options granted under the 1991 Plan (discussed above) for an aggregate of 1,508,062 Incentive Units. An additional 2,052,725
Incentive Units were granted during 2000. At December 31, 2000, 3,342,049 Incentive Units were outstanding. In 2001, 1,272,751 Incentive Units were granted, and as of December 31, 2001,
4,206,614 Incentive Units were outstanding. In 2002, 796,379 Incentive Units were granted, 131,461 Incentive Units were exercised, and as of December 31, 2002, 4,460,273 Incentive Units were
outstanding. Compensation expense for such Incentive Units was $2.0, $3.8 and $2.7 million in 2000, 2001 and 2002, respectively.

In
2000, 2001 and 2002, ISP issued restricted stock awards to three executives for 230,000, 20,000 and 250,000 shares, respectively, of ISP's common stock pursuant to individual plan
agreements. Such shares were issued subject to certain conditions with respect to transfer and other restrictions as prescribed by the plans. The restricted shares vest over a period of four to five
years. Upon the issuance of the restricted shares, unearned compensation, equivalent to the market price of the shares
on the date of grant, in the amount of $1.3, $0.2 and $2.1 million in 2000, 2001 and 2002, respectively, was charged to ISP's Stockholders' Equity and is being amortized to compensation expense
by the Company over the vesting period. Compensation expense related to these restricted shares was $0.3 million in each of 2001 and 2002. Also in 2000 and 2001, ISP granted two executives
stock bonus awards totaling 75,000 and 13,055 shares, respectively, of ISP's common stock and, in connection with such awards and the vesting of the restricted stock awards, also made loans in 2001
and 2002, totaling $167,000 and $252,000, respectively, to such executives to enable them to satisfy certain withholding tax obligations. These loans are evidenced by recourse promissory notes that
bear interest at the rate of 6.45% per annum. The loans for $167,000 were repaid on April 15, 2001. The loans aggregating $252,000 were converted to demand notes with interest at the lowest
applicable federal rate and are due and payable no later than April 15, 2003. The value of the stock awards on the date of issuance, totaling $455,000 and $100,000, was charged to compensation
expense in 2000 and 2001, respectively.

F-61

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Note 17. Related Party Transactions

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, |        
|-------------------------------------------------- |  | ------------ | -------
|
|
|ISP Parent Company                                 |  | $            | (28,623
|Building Materials Corporation of America ("BMCA") |  |              | 9,301  
|Other                                              |  |              | (292   
|                                                   |  |              |        
|Payable to related parties, net                    |  | $            | (19,614
|                                                   |  |              |        

The
$28.6 and $43.8 million payable to ISP at December 31, 2001 and 2002, respectively, represent advances of cash from ISP to ISP Investco for investment purposes.

BMCA,
an indirect subsidiary of G-I Holdings Inc. and an affiliate of the Company, and its subsidiaries purchase all of their colored roofing granules requirements
from the Company under a requirements contract, except for the requirements of certain of their roofing plants that are supplied by third parties. The Company is continuing to operate under the terms
of this contract, pending negotiation and execution of a new requirements contract with BMCA and its subsidiaries. In 2002, BMCA and its subsidiaries purchased a total of $73.2 million of
mineral products from the Company, representing 8.7% of the Company's total net sales and 77.0% of the Company's net sales of mineral products. Sales by the Company to BMCA and its subsidiaries
totaled $59.3 and $63.4 million for 2000 and 2001, respectively. The receivable from BMCA and its subsidiaries for sales of mineral products as of December 31, 2001 and 2002 was $8.8 and
$11.8 million, respectively.

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 $6.1, $6.8 and $6.2 million for 2000, 2001 and 2002,
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, 2001 and 2002 was $0.5 and $0.4 million, respectively. The Management Agreement is expected to be amended to extend the term of the agreement, effective
January 1, 2003, through December 31, 2003. 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 2001 under the Management Agreement, the aggregate amount payable to the Company under the Management Agreement for
2003 is expected to be approximately $6.4 million.

Under
the terms of the Company's previous bank credit facility, the Company or any of its subsidiaries were permitted to make loans to affiliates, and provide letters of credit issued
for the benefit of such affiliates, up to an aggregate amount not to exceed $75.0 million at any time, of which $1.1 million was utilized at December 31, 2000 in the form of a
long-term loan to its parent company. The Company and its subsidiaries also borrowed from its parent company at the same rates available to the Company under the previous bank credit
facility. At December 31, 2000, the Company had

F-62

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$50.0 million in long-term borrowings from its parent company pursuant to a note agreement which was to have matured in December 2006 and $25.0 million in
short-term borrowings. Net interest expense on net borrowings from the Company's parent company was $3.2 and $5.0 million in 2000 and 2001, respectively. All such loans were repaid
in 2001.

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 $3.047 million. Pursuant to the purchase agreement, ISP loaned such officer $3.047 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 and 2002.

Note 18. Business Segment Information

The Company is a leading multinational manufacturer of a broad spectrum of specialty chemicals and mineral products. In addition to the Mineral Products business
segment, the Company operates its Specialty Chemicals business through three reportable business segments, organized based upon the markets for their products and the internal management of the
Company, as follows:

Personal Careproducts 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.

Pharmaceutical, Food and Beverageproducts 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.

Performance Chemicals, Fine Chemicals and Industrial.The Company's Performance Chemicals business 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 polymers for use
in a wide range of markets including coatings, agriculture, imaging, detergents, electronics and metalworking. The Performance Chemicals business includes the biocides business acquired on
December 31, 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. The Company's Industrial business markets several intermediate and solvent
products, such as butanediol, tetrahydrofuran (THF) and N-methyl

F-63

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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 production of
asphalt roofing shingles.

The
following segment data are presented based on the Company's internal management reporting system for the four 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 three specialty
chemicals reportable segments (Personal Care; Pharmaceutical, Food and Beverage; and Performance Chemicals, Fine Chemicals and Industrial), as many of the Company's plant assets are utilized by
several of the segments. Therefore, the following asset-related segment data are presented only for Specialty Chemicals and Mineral Products.

F-64

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Sales
of Mineral Products to BMCA and its subsidiaries in 2000, 2001 and 2002 accounted for 82.5%, 78.6% and 77.0%, respectively, of the Company's net sales of Mineral Products,
representing 7.6%, 8.1% 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 2000, 2001 or 2002.

|                                                                                                       |                                                          | Year Ended December 31,        |      
|------------------------------------------------------------------------------------------------------ | -------------------------------------------------------- | ------------------------------ | -----
|
|
|Net sales (1):                                                                                         |                                                          |                                |      
|                                                                                                       | Personal Care                                            |                                | $    
|                                                                                                       | Pharmaceutical, Food and Beverage                        |                                |      
|                                                                                                       | Performance Chemicals, Fine Chemicals and Industrial     |                                |      
|                                                                                                       |                                                          |                                |      
|                                                                                                       |                                                          | Total Specialty Chemicals      |      
|                                                                                                       | Mineral Products (2)                                     |                                |      
|                                                                                                       |                                                          |                                |      
|Net sales                                                                                              |                                                          | $                              | 783.9
|                                                                                                       |                                                          |                                |      
|Operating income (1):                                                                                  |                                                          |                                |      
|                                                                                                       | Personal Care                                            |                                | $    
|                                                                                                       | Pharmaceutical, Food and Beverage                        |                                |      
|                                                                                                       | Performance Chemicals, Fine Chemicals and Industrial (3) |                                |      
|                                                                                                       |                                                          |                                |      
|                                                                                                       |                                                          | Total Specialty Chemicals      |      
|                                                                                                       | Mineral Products                                         |                                |      
|                                                                                                       |                                                          |                                |      
|                                                                                                       |                                                          | Total segment operating income |      
|                                                                                                       | Unallocated corporate office items                       |                                |      
|                                                                                                       | (Provision) benefit for restructuring (4)                |                                |      
|                                                                                                       | Write-off of deferred costs (5)                          |                                |      
|                                                                                                       |                                                          |                                |      
|                                                                                                       |                                                          | Total operating income         |      
|Interest expense, investment income (loss) and other expense, net                                      |                                                          |                                | 47.8 
|                                                                                                       |                                                          |                                |      
|Income before income taxes, extraordinary item and cumulative effect of change in accounting principle |                                                          | $                              | 130.1
|                                                                                                       |                                                          |                                |      
|Assets:                                                                                                |                                                          |                                |      
|                                                                                                       | Specialty Chemicals                                      |                                | $    
|                                                                                                       | Mineral Products                                         |                                |      
|                                                                                                       | General Corporate (6)                                    |                                |      
|                                                                                                       |                                                          |                                |      
|                                                                                                       |                                                          | Total assets                   |      
|                                                                                                       |                                                          |                                |      
|Capital expenditures and acquisitions:                                                                 |                                                          |                                |      
|                                                                                                       | Specialty Chemicals                                      |                                | $    
|                                                                                                       | Mineral Products                                         |                                |      
|                                                                                                       |                                                          |                                |      
|                                                                                                       |                                                          | Total                          |      
|                                                                                                       |                                                          |                                |      
|Depreciation and amortization of goodwill and intangibles:                                             |                                                          |                                |      
|                                                                                                       | Specialty Chemicals                                      |                                | $    
|                                                                                                       | Mineral Products                                         |                                |      
|                                                                                                       |                                                          |                                |      
|                                                                                                       |                                                          | Total                          |      
|                                                                                                       |                                                          |                                |      

F-65

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F-66

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Note 19. 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.

|                                         |                             | Year Ended December 31,       
|---------------------------------------- | --------------------------- | ------------------------------
|
|
|Net sales:                               |                             |                               
|                                         | North America:              |                               
|                                         |                             | United States                 
|                                         |                             | Canada                        
|                                         |                             |                               
|                                         |                             |                               
|                                         |                             |                               
|                                         | Europe:                     |                               
|                                         |                             | Germany                       
|                                         |                             | United Kingdom                
|                                         |                             | France                        
|                                         |                             | Italy                         
|                                         |                             | Spain                         
|                                         |                             | Netherlands                   
|                                         |                             | Switzerland                   
|                                         |                             | Belgium                       
|                                         |                             | 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 |                             | $                             
|                                         |                             |                               

Approximately 51% of the Company's sales in 2002 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.

F-67

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Note 20. 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 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, 2001 and 2002, was approximately $26.6 and $22.4 million, respectively, before reduction for insurance recoveries reflected on the
Company's Consolidated Balance Sheets (discussed below) of $21.7 and $24.0 million, respectively, that relate to both past expenses and estimated future liabilities ("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 in

F-68

---

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 $13.0 million.



Two of the Company's three suppliers of acetylene, a significant raw material used in the production of most of its specialty chemicals at its Texas City and
Calvert City manufacturing facilities, provide this raw material pursuant to take-or-pay supply contracts. One of these contracts expires in June 2003 and the other
contract will end in June 2003 as a result of the supplier's announced closure of its processing facility that produces acetylene. The Company has secured an alternative source to one of these
agreements and has entered into a five-year contract under which the Company is obligated to purchase specified quantities of acetylene.

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,
2001 and 2002 in the amount of $0.4 and $1.5 million, respectively. The Company has an operating lease for a sale-leaseback transaction related to equipment at its Freetown,
Massachusetts manufacturing facility, which was entered into in 1998. The lease had an initial term of four years and, at the Company's option, up to three one-year renewal periods. The
first renewal term commenced during 2002. 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 table of future minimum operating lease payments below excludes any payment related to the guaranteed payment which is due upon
termination 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. The
Company is obligated to pay a maximum

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guaranteed payment amount upon the return of the equipment. At December 31, 2002, the maximum amount due relative to the return of equipment provision was $35.8 million. This maximum
payment
amount would be reduced by 50% of any proceeds from the subsequent sale of the equipment in excess of $5.2 million.

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 $17.9,
$17.4 and $14.3 million for 2000, 2001 and 2002, respectively. Future minimum lease payments for properties which were held under long-term noncancelable leases and future
obligations under unconditional purchase contracts as of December 31, 2002 were as follows:

|                                            |  | Capital
Leases |       | Operating
Leases |   | Unconditional
Purchase
Obligations
|------------------------------------------- |  | -------------- | ----- | ---------------- | - | ----------------------------------
|
|2003                                        |  | $              | 631   |                  | $ | 9,712                             
|2004                                        |  |                | 491   |                  |   | 8,113                             
|2005                                        |  |                | 271   |                  |   | 6,108                             
|2006                                        |  |                |      |                  |   | 1,100                             
|2007                                        |  |                |      |                  |   | 1,071                             
|Later years                                 |  |                |      |                  |   | 6,066                             
|                                            |  |                |       |                  |   |                                   
|Total minimum payments                      |  |                | 1,393 |                  | $ | 32,170                            
|                                            |  |                |       |                  |   |                                   
|Less interest included above                |  |                | (74   | )                |   |                                   
|                                            |  |                |       |                  |   |                                   
|Present value of net minimum lease payments |  | $              | 1,319 |                  |   |                                   
|                                            |  |                |       |                  |   |                                   



The Company has received approval from the New Jersey Turnpike Authority for a direct access ramp extension from the New Jersey Turnpike to its 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 9 for information regarding additional contingencies.

Note 21. Subsequent Events

On February 28, 2003, a Special Meeting of Stockholders of ISP was held seeking approval of a proposal of an 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 would be entitled to receive $10.30 per share in
cash for each share of ISP common stock owned (except as otherwise provided in the merger agreement). Samuel J. Heyman, Chairman of ISP, formed International Specialty Products Holdings, Inc.
for purposes of entering into this transaction and was 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. The Agreement and Plan of Merger was approved by both a
majority of the holders of the shares of common stock outstanding and entitled to

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vote at ISP's Special Meeting and a majority of the minority holders (being those shares not owned beneficially by Mr. Heyman or the officers and directors of ISP) of shares of common stock
outstanding and entitled to vote at ISP's Special Meeting. Subsequently, ISP's common stock is no longer publicly traded and ISP delisted its common stock on the New York Stock Exchange and
deregistered its common stock 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 completing this going private transaction, the Company's stock-based compensation plans were terminated and settled in accordance with
the terms of the merger agreement.

On
March 20, 2003, the Hercules Shareholders' Committee for New Management (the "Committee") notified Hercules Incorporated of its intent to present at Hercules' 2003 Annual
Meeting of Shareholders, and solicit proxies in favor of, the election of an additional slate of four directors committed to maximizing value for all Hercules shareholders. The Committee is comprised
of (i) ISP; (ii) four current members of the Hercules board of directors, that includes the Company's Chairman, Samuel J. Heyman and the Company's Chief Executive Officer and President,
Sunil Kumar; and (iii) the four nominees for the Hercules Board of Directors. On March 20, 2003, the Committee filed with the Securities and Exchange Commission a preliminary proxy statement in
connection with Hercules' Annual Meeting. ISP beneficially owns approximately 9.1% of the outstanding shares of Hercules' common stock.

F-71

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

|                                                                                                              |  | 2001 by Quarter |       | 2002 by Quarter |  
|------------------------------------------------------------------------------------------------------------- |  | --------------- | ----- | --------------- | -
|
|
|Net sales                                                                                                     |  | $               | 203.2 |                 | $
|Cost of products sold                                                                                         |  |                 | 133.3 |                 |  
|                                                                                                              |  |                 |       |                 |  
|Gross profit                                                                                                  |  | $               | 69.9  |                 | $
|                                                                                                              |  |                 |       |                 |  
|Operating income                                                                                              |  | $               | 26.1  |                 | $
|                                                                                                              |  |                 |       |                 |  
|Income (loss) before income taxes, extraordinary item and cumulative effect of change in accounting principle |  | $               | 32.7  |                 | $
|Income tax (provision) benefit                                                                                |  |                 | (11.5 | )               |  
|                                                                                                              |  |                 |       |                 |  
|Income (loss) before extraordinary item and cumulative effect of change in accounting principle               |  |                 | 21.2  |                 |  
|Extraordinary item                                                                                            |  |                 |      |                 |  
|Cumulative effect of change in accounting principle, net of income tax benefit                                |  |                 | (0.4  | )               |  
|                                                                                                              |  |                 |       |                 |  
|Net income (loss)                                                                                             |  | $               | 20.8  |                 | $
|                                                                                                              |  |                 |       |                 |  

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SCHEDULE II

INTERNATIONAL SPECIALTY HOLDINGS INC.    VALUATION AND QUALIFYING ACCOUNTS    Year Ended December 31, 2000

|Description                                                                 |                                                | Balance
January 1,
2000 |   | Charged to
Costs and
Expenses |  | Deductions |        | Other |   | Balance
December 31,
2000
|--------------------------------------------------------------------------- | ---------------------------------------------- | ----------------------- | - | ----------------------------- |  | ---------- | ------ | ----- | - | -------------------------
|
|Valuation and Qualifying Accounts Deducted from Assets to which They Apply: |                                                |                         |   |                               |  |            |        |       |   |                          
|                                                                            | Allowance for doubtful accounts                |                         | $ | 3,411                         |  | $          | 1,934  |       | $ | 434                      
|                                                                            | Reserve for inventory market valuation         |                         |   | 15,148                        |  |            | 11,902 |       |   | 8,535                    
|                                                                            | Reserves for restructuring and staff reduction |                         |   | 1,324                         |  |            | 3,613  |       |   | 1,324                    

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 |                          

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Notes:

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