<PAGE>

FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
                                                             1997                         1996
                                                     ----------------------       ----------  ----------
dollars in millions, except per share data            Amount      Per share        Amount      Per share
--------------------------------------------------------------------------------------------  ----------
<S>                                                  <C>          <C>             <C>          <C>
Net sales                                            $2,340.6                     $2,215.0
Income from continuing operations                    $  213.6      $ 1.48         $  178.7      $ 1.20
Net income                                           $  343.0      $ 2.38         $  334.2      $ 2.24
Book value at end of year                            $1,734.3      $12.65         $1,672.8      $11.75
Total debt to capitalization                             12.6%                        13.0%
--------------------------------------------------------------------------------------------  ----------
</TABLE>

QUARTERLY FINANCIAL HIGHLIGHTS (UNAUDITED)                

<TABLE>
<CAPTION>

                                                                                     
                                                                   Fiscal year 1997                 
                                                     -----------------------------------------------
                                                                  Three months ended                
                                                     -----------------------------------------------
in millions, except per share data                    June 30     March 31     Dec. 31     Sept. 30 
--------------------------------------------------------------------------------------------------- 
<S>                                                   <C>         <C>          <C>         <C>      
Net sales                                             $ 614.9     $  638.5     $ 564.2     $  523.0 
Gross profit                                            199.9        208.0       179.5        172.9 
Income from continuing operations                                                                   
  before income taxes                                    83.4        100.6        79.2         70.6 
                                                                                                    
Income from continuing operations                     $  53.5     $   64.4     $  50.6     $   45.1 
Income from discontinued operations,                                                                
   net of income taxes                                   13.4         44.9        37.5         33.6 
                                                      -------     --------     -------     -------- 
Net income                                            $  66.9     $  109.3     $  88.1     $   78.7 
                                                      -------     --------     -------     -------- 

Per share(1):                                                                                       
   Income from continuing operations                  $   .37     $    .45     $   .35     $    .31 
   Income from discontinued operations                    .10          .31         .26          .23 
                                                      -------     --------     -------     -------- 
   Net income                                         $   .47     $    .76     $   .61     $    .54 
                                                      -------     --------     -------     -------- 
Cash dividends per share(2)                           $   .12     $    .15     $   .15     $    .15 
                                                                                                    
Market price of common stock(3)                                                                     
  High                                                $42 7/8     $ 44 5/8     $ 43        $ 39 3/4 
  Low                                                  29 7/8       40           38 1/8      33 1/4 

<CAPTION>

                                                              Fiscal year 1996   
                                                ---------------------------------------------
                                                             Three months ended   
                                                ---------------------------------------------  -----------  
                                                June 30 (4)     March 31 (5)     Dec. 31 (6)     Sept. 30   
                                                ---------------------------------------------  -----------  
                                                <S>             <C>              <C>             <C>
Net sales                                       $  519.1         $  629.8         $  559.5         $  506.6 
Gross profit                                       166.0            196.9            174.9            159.5 
Income from continuing operations                                                                           
  before income taxes                               37.4            102.9             88.2             56.8 
                                                                 
Income from continuing operations               $   21.4         $   65.2         $   56.0         $   36.1 
Income from discontinued operations,                                                                        
   net of income taxes                              38.3             42.5             43.5             31.2 
                                                --------         --------         --------         -------- 
Net income                                      $   59.7         $  107.7         $   99.5         $   67.3 
                                                --------         --------         --------         -------- 
                                                                                                            
Per share(1):                                                                                               
   Income from continuing operations            $    .15         $    .44         $    .37         $    .24 
   Income from discontinued operations               .26              .28              .29              .21 
                                                --------         --------         --------         -------- 
   Net income                                   $    .41         $    .72         $    .66         $    .45 
                                                --------         --------         --------         -------- 
Cash dividends per share(2)                     $    .13         $    .13         $    .13         $    .13 
                                                                                                            
Market price of common stock(3)                                                                             
  High                                          $ 39 3/4         $ 40 1/4         $ 36 1/8         $ 34     
  Low                                             34 3/8           34               29 5/8           28 1/8 
                                           
</TABLE>


(1)  Per share income has been calculated based on the average number of 
     common and common equivalent shares outstanding for the company and the 
     predecessor corporation (Old Morton). 

(2)  Cash dividends reflect total payments made by Old Morton through April 
     30, 1997, and by the company thereafter.  Refer to Spinoff and Basis of 
     Presentation footnote.

(3)  The principal market is the New York Stock Exchange and prices are based 
     on the Composite Tape (Ticker symbol MII).  Stock prices after April 30, 
     1997 reflect the result of the Spinoff described in the Spinoff and 
     Basis of Presentation footnote.

(4)  Includes special charges of $29.2 million pretax ($23.9 million after 
     tax or $.16 per share).  Refer to Special Charges footnote.

(5)  Includes $15.0 million proceeds ($9.4 million after tax or $.06 per 
     share) related to the formation of a joint venture.

(6)  Includes $24.1 million pretax income ($15.1 million after tax or $.10 
     per share) related to the settlement of several environmental insurance 
     issues.


2
<PAGE>

SELECTED FINANCIAL DATA (1)
<TABLE>
<CAPTION>

dollars in millions, except per share data        1997       1996       1995       1994       1993 
---------------------------------------------------------------------------------------------------
OPERATIONS                                                    
<S>                                           <C>        <C>        <C>        <C>        <C>
Net sales                                     $2,340.6   $2,215.0   $2,099.6   $1,911.1   $1,785.8 
Cost of products sold                          1,580.3    1,517.7    1,424.1    1,277.8    1,201.9 
Selling, administrative and                                                                  
  general expense                                378.5      361.1      361.4      373.0      356.2 
Research and development expense                  58.8       60.2       58.1       53.8       54.6 
Interest expense                                  25.6       24.4       28.4       27.8       33.5 
Amortization of goodwill                          11.2       10.3       10.3       10.4       10.7 
Special charges (income)                            --       29.2         --         --       30.0 
Income from continuing operations before                                                           
  other charges, net of income taxes(2)          213.6      178.7      152.7      123.3       77.2 
Other charges to income(3)                          --         --         --         --       90.7 
Income (loss) from continuing operations         213.6      178.7      152.7      123.3      (13.5)
Income (loss) from discontinued operations       129.4      155.5      141.4      103.2       46.0 
Net income                                       343.0      334.2      294.1      226.5       32.5 
Provision for depreciation(4)                    100.3       88.8       83.1       77.6       75.5 
---------------------------------------------------------------------------------------------------
FINANCIAL
                                                                                                   
Total assets                                  $2,804.9   $2,629.1   $2,652.0   $2,352.3   $2,154.5 
Working capital                                  866.9      415.5      398.9      286.2      228.8 
Current ratio                                      2.7        1.9        1.8        1.6        1.5 
Long-term debt                                $  224.1   $  218.5   $  218.5   $  198.6   $  217.8 
Total debt to capitalization                      12.6%      13.0%      13.3%      15.6%      20.7%
Shareholders' equity                          $1,734.3   $1,672.8   $1,663.5   $1,399.6   $1,200.2 
Shareholders' equity per share                $  12.65   $  11.75   $  11.22   $   9.48   $   8.20 
Return on shareholders' equity(5)                 20.5%      20.1%      21.0%      18.9%      10.4%
Capital expenditures(4)                       $  117.4   $  124.4   $  126.4   $  125.0   $   97.9 
Cash dividends paid(6)                            80.7       76.3       65.1       54.9       46.6 
---------------------------------------------------------------------------------------------------
PER SHARE DATA(8)

Income from continuing operations before                                                           
  other charges, net of income taxes(2)       $   1.48   $   1.20   $   1.02   $    .82   $    .52 
Other charges to income(3)                          --         --         --         --       (.61)
                                              --------   --------   --------   --------   -------- 
Income (loss) from continuing operations          1.48       1.20       1.02        .82       (.09)
Income (loss) from discontinued operations         .90       1.04        .94        .69        .31 
                                              --------   --------   --------   --------   -------- 
Net income                                    $   2.38   $   2.24   $   1.96   $   1.51   $    .22 
                                              --------   --------   --------   --------   -------- 
Cash dividends paid(6)                        $   .570   $   .520   $   .440   $   .373   $   .320 
---------------------------------------------------------------------------------------------------
GENERAL

Average number of common shares                                                                    
  outstanding (in thousands)(8)                143,945    149,391    150,140    150,090    148,113 
Approximate number of shareholders              10,500     10,625      9,900      8,860      9,370 
Approximate number of employees(4)              10,500      8,700      8,800      8,800      8,700 
---------------------------------------------------------------------------------------------------

<CAPTION>

                                                1992       1991       1990     1989 (7)   1988 (7) 
----------------------------------------------------------------------------------------------------
OPERATIONS
<S>                                            <C>        <C>        <C>        <C>        <C>
Net sales                                      $1,715.0   $1,680.7   $1,475.7   $1,356.3   $1,231.0 
Cost of products sold                           1,152.7    1,146.4      990.1      910.1      807.7 
Selling, administrative and                                                                         
  general expense                                 317.3      273.7      249.8      216.5      211.7 
Research and development expense                   52.1       54.3       44.3       36.7       34.9 
Interest expense                                   33.8       36.4       17.3        9.1        4.1 
Amortization of goodwill                           10.8       10.6        7.0        5.7        5.1 
Special charges (income)                             --         --      (14.3       37.1         -- 
Income from continuing operations before                                                            
  other charges, net of income taxes(2)           113.3      117.9      124.5      100.0      117.4 
Other charges to income(3)                           --         --         --         --        3.8 
Income (loss) from continuing operations          113.3      117.9      124.5      100.0      113.6 
Income (loss) from discontinued operations         31.2       20.4       10.3       (2.9)      (1.0)
Net income                                        144.5      138.3      134.8       97.1      112.6 
Provision for depreciation(4)                      73.9       69.5       61.6       54.7       51.8 
----------------------------------------------------------------------------------------------------
FINANCIAL

Total assets                                   $2,056.7   $1,886.6   $1,781.7   $1,347.8   $1,173.3 
Working capital                                   251.7      288.0      281.4      238.9      214.6 
Current ratio                                       1.6        1.8        1.7        1.8        1.9 
Long-term debt                                 $  222.6   $  255.7   $  261.4   $   43.9   $   45.6 
Total debt to capitalization                       20.3%      22.2%      24.1%       9.4%       8.4%
Shareholders' equity                           $1,222.9   $1,103.4   $1,008.1   $  900.7   $  790.1 
Shareholders' equity per share                 $   8.40   $   7.61   $   7.00   $   6.27   $   5.53 
Return on shareholders' equity(5)                  13.1%      13.7%      15.0%      12.3%      17.2%
Capital expenditures(4)                        $   92.0   $   98.0   $   82.8   $   92.0   $   76.8 
Cash dividends paid(6)                             46.5       45.2       41.4         --         -- 
----------------------------------------------------------------------------------------------------
PER SHARE DATA(8)

Income from continuing operations before                                                            
  other charges, net of income taxes(2)        $    .77   $    .81   $    .86   $    .70   $    .81 
Other charges to income(3)                           --         --         --         --       (.02)
                                               --------   --------   --------   --------   -------- 
Income (loss) from continuing operations            .77        .81        .86        .70        .79 
Income (loss) from discontinued operations          .21        .14        .07       (.02)        -- 
                                               --------   --------   --------   --------   -------- 
Net income                                     $    .98   $    .95   $    .93   $    .68   $    .79 
                                               --------   --------   --------   --------   -------- 
Cash dividends paid(6)                         $   .320   $   .313   $   .287         --         -- 
----------------------------------------------------------------------------------------------------
GENERAL

Average number of common shares                                                                     
  outstanding (in thousands)(8)                 147,140    145,583    144,458    143,678    143,558 
Approximate number of shareholders                9,870     10,190     10,600     11,280     11,930 
Approximate number of employees(4)                8,600      8,800      8,800      7,900      7,500 
----------------------------------------------------------------------------------------------------
</TABLE>

(1)  The Selected Financial Data primarily reflect the continuing operations 
     of the company's specialty chemicals, salt and corporate operations 
     which were spun-off to shareholders of Old Morton in a tax free 
     distribution in the U.S. effective April 30, 1997.  The operations of 
     the Automotive Safety Products business have been accounted for as 
     discontinued operations in all periods prior to the Spinoff.  Refer to 
     Spinoff and Basis of Presentation footnote.

(2)  Fiscal 1996 included special charges of $23.9 million or $.16 per share. 
     Refer to Special Charges footnote. Fiscal 1996 also included $15.1 
     million or $.10 per share related to the settlement of several 
     environmental insurance issues and $9.4 million or $.06 per share 
     related to proceeds received for the formation of a joint venture.  
     Fiscal 1993 included special accruals related to the restructuring of 
     operations including disposition of facilities and relocation of 
     manufacturing facilities of $19.1 million or $.13 per share.  Fiscal 
     1990 included the gain on sale of a 40 percent interest in a foreign 
     affiliate of $13.1 million or $.09 per share and unusual charges of $7.3 
     million or $.05 per share for additional anticipated costs related 
     primarily to previously divested operations and to the Spinoff from 
     Thiokol Corporation. Fiscal 1989 included reorganization and other 
     unusual charges of $25.0 million or $.17 per share.

(3)  1993 charge was the cumulative effect of change in accounting for 
     postretirement benefits other than pensions and postemployment benefits. 
     1988 charge was the cumulative effect of change in accounting for 
     income taxes.

(4)  Continuing operations only.

(5)  Based on net income before other charges including those related to 
     discontinued operations and calculated on beginning-of-year 
     shareholders' equity. 

(6)  Cash dividends reflect total payments made by Old Morton through April 
     30, 1997 and by the company thereafter.  Refer to Spinoff and Basis of 
     Presentation footnote.

(7)  Effective July 1, 1989, Morton Thiokol, Inc. (MTI) transferred its 
     commercial businesses and certain corporate assets and certain 
     liabilities to Old Morton.  Since July 1, 1989, MTI (now Thiokol 
     Corporation) and the company have been independent companies.  MTI was 
     responsible for dividend payments prior to July 1, 1989.

(8)  For fiscal 1990 through 1997, per share amounts were calculated based on 
     the average number of common and common equivalent shares outstanding 
     for the company and Old Morton described in note (1) above.  For periods 
     prior to July 1, 1989, per share amounts were calculated based on the 
     average number of common and common equivalent shares outstanding for 
     MTI.


8

<PAGE>
                   MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ON APRIL 30, 1997, MORTON INTERNATIONAL, INC. COMPLETED THE SPINOFF OF ITS 
SPECIALTY CHEMICALS AND SALT BUSINESSES INTO A NEW COMPANY, REFERRED TO AS 
"NEW" MORTON INTERNATIONAL, INC. SEE PAGE 20 OF THE NOTES TO CONSOLIDATED 
FINANCIAL STATEMENTS FOR A MORE DETAILED DESCRIPTION OF THE SPINOFF.

     "NEW" MORTON INTERNATIONAL, INC. (THE COMPANY) MANUFACTURES AND MARKETS 
QUALITY PRODUCTS TO MEET THE NEEDS OF ITS SALT AND SPECIALTY CHEMICALS 
CUSTOMERS. FOR REPORTING PURPOSES, THE COMPANY SEPARATES REVENUES AND COSTS 
INTO TWO BUSINESS SEGMENTS -- SPECIALTY CHEMICALS AND SALT.

     THE FOLLOWING IS A DISCUSSION OF OPERATING RESULTS COMPARING FISCAL 
YEARS 1997 TO 1996 AND 1996 TO 1995; LIQUIDITY AND CAPITAL RESOURCES; AND THE 
IMPACT OF INFLATION AND ENVIRONMENTAL MATTERS. 

COMPARISON: FISCAL 1997 TO FISCAL 1996

Boosted by strong fourth quarter volumes in chemicals and the recent 
acquisitions of Salins du Midi and Pulverlac, the company generated sales of 
$2.34 billion, an increase of 6 percent from fiscal 1996 sales of $2.22 
billion.  Income from continuing operations increased 20 percent to $213.6 
million. Fiscal 1996 income from continuing operations included special 
charges of $23.9 million ($29.2 million pretax), offset by $15.1 million 
($24.1 million pretax) related to the settlement of several environmental 
insurance issues and $9.4 million ($15.0 million pretax) related to proceeds 
received for the formation of a joint venture.  Income from discontinued 
operations, net of applicable income taxes, was $129.4 million in fiscal 1997 
versus $155.5 million in 1996. Fiscal 1997 discontinued operations included 
10 months of Morton Automotive Safety Products results versus a full year in 
1996.  On an earnings per share basis, continuing operations increased from 
$1.20 in fiscal 1996 to $1.48 in the current year. Total earnings per share 
in fiscal 1997, including the results of Morton's Automotive Safety Products 
business for 10 months, was $2.38 versus $2.24 in fiscal 1996, an increase of 
6 percent.

     SPECIALTY CHEMICALS
For the full year 1997, Morton's specialty chemicals sales were up 4 percent 
to $1.68 billion from $1.61 billion in 1996.  The increase in sales was 
mainly attributed to higher volumes and the Pulverlac acquisition which 
contributed $35.4 million to 1997 sales.
     
      Those product lines contributing most to the increase were industrial 
adhesives, thermoplastic polyurethanes, advanced materials, plastics 
additives, industrial coatings and powder coatings.  These product lines 
contributed $588.7 million or 35 percent of specialty chemicals full year 
sales.  Year-over-year growth of the combined sales of these product lines 
was 10 percent, contributing approximately 76 percent of the year-over- year 
sales increase.

      Operating earnings rose 21 percent to $268.6 million during the year or 
8 percent excluding the prior year $27.1 million pretax special charge.  
Strong profit contributors included packaging adhesives, advanced materials, 
performance chemicals, plastics additives, industrial coatings and powder 
coatings.  Automotive coatings results, excluding the impact of the creation 
of the joint venture in January 1996, were also up in fiscal 1997.  Operating 
earnings of these product lines contributed $188.4 million or 70 percent of 
specialty chemicals earnings in fiscal 1997.  Combined, these product lines 
grew 20 percent from fiscal 1996 and contributed 51 percent to the 
year-over-year increase.  Packaging adhesives achieved its 10 percent 
earnings growth despite a 4 percent decrease in sales from 1996.  Improved 
manufacturing processes, tight cost controls and lower raw material costs 
were the main reasons for the year-to-year earnings increase.  

     The electronic materials, dyes and polymer systems product lines showed 
unfavorable year-to-year comparisons for both sales and earnings.  Sales 
decreased 3 percent while earnings dropped 21 percent. All three of these 
product lines have experienced strong competitive pricing pressures which 
have led to decreased earnings. These product lines contributed 20 percent of 
specialty chemicals sales and 19 percent of fiscal 1997 earnings. 


20
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)

     Morton's specialty chemicals improved their return on net sales to 16 
percent in fiscal 1997 from 15.5 percent in fiscal 1996, before special 
charges.  This improvement can be attributed to lower raw material costs as 
well as tight cost controls and some benefit from the restructuring in fiscal 
1996.  The translation of foreign exchange negatively impacted sales by $29.4 
million and pretax earnings by $3.6 million in fiscal 1997.

     SALT
For the full year ended June 30, 1997, Morton's salt business had sales 
of $659.7 million, a 9 percent increase, and operating earnings of $137.5 
million, up 10 percent.  Except for sales of ice control salt, all North 
American salt product lines were up for the full year, and without the 
benefit of Salins du Midi, salt sales would have increased by 1 percent.  
Although Canadian ice control salt demand was high, salt sales for deicing in 
the United States could not compare to the extraordinary winter of 1995-96.

     Sales of non-ice control products in North America increased 4 percent 
over fiscal 1996.  The sales increase was primarily due to improved results 
for water conditioning, evaporated and solar products.  Evaporated products 
increased $6.9 million or 7 percent to $103.0 million.  Solar products 
increased 6 percent in fiscal 1997 with sales of $52.1 million while water 
conditioning products increased $3.2 million from sales of $124.2 million in 
fiscal 1996.

     Morton salt's business recorded sales of $156.4 million in the fourth 
quarter, up 54 percent over fourth quarter 1996; operating earnings increased 
21 percent to $20.0 million in the same period. The fourth quarter increase 
was primarily due to the addition of $48.1 million of sales and $3.8 million 
of operating earnings from Salins du Midi, as this was the first quarter of 
inclusion of its results.

     In the fourth quarter of fiscal 1995, the company's Mines Seleine salt 
mine on the Magdalen Islands was shut down due to water intrusion into the 
production shaft. Production was suspended at this mine with corresponding 
increased production at the company's remaining ice control mines.  
Operations at the mine resumed in August of fiscal 1998.  Costs related to 
the efforts to save the mine have been deferred. The company expects such 
costs to be recovered from insurance proceeds.

     CORPORATE
In the fourth quarter of fiscal 1997, Morton sold its former 
headquarters building and recorded a pretax gain of $4.4 million. At the end 
of April, the company received $750 million as part of its tax free Spinoff 
from Automotive Safety Products. Some of this cash was used to pay down 
short-term debt, mainly incurred with the acquisitions of Pulverlac and 
Salins du Midi. Additionally,  $99.9 million was used to purchase 3.2 million 
shares of stock under the April 1997 board authorization of a 10 million 
share buyback. At June 30, 1997, the company's cash and short-term 
investments position was $430.3 million.

     For the full fiscal year 1997, Morton acquired 6.5 million of its shares 
outstanding for $234.9 million. Between July 1, 1996 and April 30, 1997, the 
company bought 3.3 million shares at an average price of $41.24 completing an 
earlier repurchase authorization before the April 30 spinoff.  Average shares 
outstanding for the fiscal year were 143.9 million versus 149.4 million in 
fiscal 1996. Fewer shares outstanding and a lower tax rate added 8 cents to 
earnings per share for the full year.

     Total corporate expenses increased 18 percent in fiscal 1997. This 
increase was due to the receipt of $24.1 million in the second quarter of 
fiscal 1996 related to the settlement of several environmental insurance 
issues.  Excluding this income from fiscal 1996, corporate costs decreased 16 
percent year-to-year.  Tight control of administrative expenses, the gain on 
the sale of the former headquarters site and lower net interest expense were 
the main reasons for the decrease in fiscal 1997. 

     The company's effective tax rate decreased to 36.0 percent in fiscal 
1997 from 37.4 percent in fiscal 1996.  The main reason for the decrease in 
the effective tax rate was the fact that fiscal 1996 included an impairment 
loss on long-lived assets with no tax benefit.

-------------------------------------------------------------------
COMPARISON: FISCAL 1996 TO FISCAL 1995

The company continued its trend of sales and earnings growth in fiscal 1996. 
Sales grew 5 percent during fiscal 1996 to $2.22 billion from $2.10 billion 
in fiscal 1995.  Net income from continuing operations in fiscal 1996 of 
$178.7 million, after special charges, was up 17 percent from fiscal 1995 net 
income. Before the special charges, fiscal 1996 earnings from continuing 
operations of $202.6 million were up 33 percent over fiscal 1995. Included in 
fiscal 1996 earnings from continuing operations were $24.1 million pretax 
income ($15.1 million after tax) related to the settlement of several 
environmental insurance issues and $15.0 million pretax income ($9.4 million 
after tax) related to proceeds received from the formation of a joint 
venture. Income from discontinued operations, net of applicable income taxes, 
of $155.5 million grew 10 percent from fiscal 1995.  Total net income 
increased 14 percent in fiscal 1996 to $334.2 million, after special charges.

     Earnings per share from continuing operations of $1.20, after special 
charges, were up 18 percent from fiscal 1995 earnings per share from 
continuing operations of $1.02.  Before special charges, earnings per share 
from continuing operations were $1.36, up 33 percent over fiscal 1995.  
Earnings per share from discontinued operations were $1.04 and $.94 in fiscal 
1996 and 1995.

     Fiscal 1996 included special charges of $29.2 million pretax ($23.9 
million after tax) recorded in the fourth quarter. A portion of these charges 
was for costs related to the closure of three chemical manufacturing 
facilities -- an initial phase of a broader facility consolidation and 
product line rationalization program, and certain organizational changes.  
These actions, when completed,


21

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)

are expected to result in annual savings to the company of more than $8.5 
million.  Also included in the special charges was the impact of the early 
adoption of the new accounting standard related to the impairment of 
long-lived assets. 

     SPECIALTY CHEMICALS
For the fiscal year ended June 30, 1996, sales of the chemicals business rose 
3 percent to $1.61 billion, and operating earnings were down 1 percent to 
$222.0 million from $223.5 million in fiscal 1995. 

     Fiscal 1996 results included special charges of $27.1 million, as well 
as the $15.0 million gain recorded in the third quarter for the formation of 
a joint venture, Morton Nippon Coatings.

     The special charges were made up of $11.3 million related primarily to 
the announced closing of the Seabrook, New Hampshire, Stamford, Connecticut 
and Dixon, California facilities; and $15.8 million related to the write-down 
of certain assets of the defense-related chemical vapor deposition product 
line as required by Financial Accounting Standards Board (FASB) Statement No. 
121.  As these three plants are closed over the next 18 months, the 
production at these facilities will be moved to other Morton locations, 
resulting in better asset utilization and lower overall costs. Excluding 
these special charges, operating earnings increased 11 percent for fiscal 
1996.

     The formation of the Morton Nippon Coatings joint venture, which 
produces plastic substrate coatings for Japanese transplant car companies in 
the United States, resulted in  reduced sales for the fourth quarter and 
total year by approximately $7.0 million and $14.5 million respectively, and 
reduced earnings from operations in these same two periods by approximately 
$2.8 million and $3.8 million respectively.

     The year-over-year sales increase for the chemicals segment was a 
combination of improved volume, pricing and product mix. Offsetting this 
improvement were higher raw material costs. Although many raw material costs 
decreased in the fourth quarter, the chemicals segment experienced overall 
raw material cost increases during the year which had an unfavorable impact 
of approximately $11.0 million.  The effect on operating profits of the raw 
material cost increases was mitigated by improved pricing and product mix, 
the reengineering of manufacturing processes to improve efficiency, tight 
period cost control and higher volumes. 

     Those product lines that had strong year-over-year performances included 
European industrial activities, performance chemicals, metalorganics, polymer 
systems and electronic materials. These product lines combined contributed 
$468.7 million or 29 percent of specialty chemicals sales in 1996. These same 
product lines contributed 36 percent of the segment's operating profit. 
Compared with fiscal 1995, sales of these product lines increased 10 percent 
and earnings increased 35 percent.  Earnings growth outpaced sales growth due 
to favorable mix, lower operating costs and tight control over period costs, 
leveraged against higher volumes.

     Two product lines, plastics additives and dyes, ended fiscal 1996 with 
sales and profits below their fiscal 1995 level. The combined sales of these 
lines in fiscal 1996 were $158.5 million, 18 percent lower than fiscal 1995 
for fiscal 1996, operating profits for these businesses were 10 percent lower 
than fiscal 1995. Tougher competitive pricing adversely affected the dyes 
business for the second consecutive year, while adverse market conditions in 
the building industry hurt plastics additives performance.  Continued control 
over operating costs partially offset the negative impact of reduced sales on 
earnings.

     The translation impact of changes in foreign currency rates had a 
minimal favorable impact, less than 1 percent, on sales and earnings in 1996.
     

     SALT
Fiscal 1996 salt sales reached a record $603.3 million, up 13 percent.  
Salt's operating earnings, also a record, were up 6 percent, ending the year 
at $124.7 million.  While all product lines did well, ice control salt sales 
were up 32 percent over fiscal 1995, and were primarily responsible for the 
strong salt performance for the year.  Severe winter storms during the third 
quarter of this fiscal year, particularly in the northeastern United States, 
increased the demand for ice control salt in several key markets.

     Sales of non-ice control salt increased 4 percent over fiscal 1995.  The 
sales increase was primarily due to improved results for water conditioning 
and solar products.  Pellets sales increased 6 percent mainly due to 
increased shipments to a major customer. The increase in solar products was 
mainly due to volume growth of 7 percent.  

     Salt's earnings did not increase at the same rate as sales largely due 
to the higher mix of lower margin ice control business. 

     CORPORATE 
In October 1995, the Board of Directors of "Old" Morton International, Inc. 
authorized the repurchase of 10 million shares of the company's common stock. 
As of June 30, 1996, Morton had repurchased a total of 6.7 million shares. 
The weighted average cost per share for the shares repurchased was 
approximately $36.00.

     For the year, total corporate costs decreased 37 percent. This decrease 
was due primarily to the receipt of $24.1 million in the second quarter 
related to the settlement of several environmental insurance issues, as well 
as the tight control of administrative costs and lower net interest expense. 
Included in corporate costs was a special charge of $2.1 million to reflect 
the current estimated value of certain assets held for disposition.   

     The company's effective tax rate remained relatively flat between fiscal 
1996 and 1995. 

-------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES

     OPERATING ACTIVITIES
Cash provided by continuing operating activities was $291.3 million, $270.3 
million and $210.2 million in the three fiscal periods ended June 30, 1997. 
Net cash from operations in fiscal 1997 increased $21.0 million as income 
from continuing operations increased $34.9 million. Depreciation and 
amortization expense increased 


23
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)

$13.1 million in fiscal 1997.  Changes in operating assets and liabilities 
were a use of funds in 1997, 1996 and 1995 of $36.6 million, $38.4 million 
and $38.3 million, respectively.  

     Net cash from operations in fiscal 1996 increased $60.1 million over 
fiscal 1995 as income from continuing operations increased $26.0 million.  In 
addition, the special charges of $29.2 million discussed above did not 
adversely impact cash in fiscal 1996. Depreciation and amortization expense 
increased $5.5 million in fiscal 1996. 

     INVESTING ACTIVITIES
Net investing activities for fiscal 1997 required $420.2 million of cash 
compared with $122.4 million and $138.3 million in fiscal 1996 and 1995. Net 
investing activities included capital spending of $117.4 million in fiscal 
1997 compared to $124.4 million in 1996 and $126.4 million in 1995. Expansion 
related to certain chemical products as well as basic upkeep of the salt and 
chemical facilities were the major areas of capital spending.

     Cash invested in businesses acquired was the main reason for the 
increase of cash used in investing activities.     In fiscal 1997, the 
company acquired all of the outstanding stock of a French salt company, 
Salins du Midi, for $231.2 million, net of cash acquired. During fiscal 1997, 
the company also acquired 90 percent of the outstanding stock of Pulverlac 
S.p.A., an Italian powder coatings manufacturer, for $64.2 million, net of 
cash acquired, and a manufacturing plant in Singapore from Zeneca Resins for 
$14.1 million. 

     Investing activities in fiscal 1997 also reflected $8.9 million of 
proceeds from property and other asset disposals compared to $4.3 million in 
fiscal 1996 and $2.2 million in fiscal 1995.     

     FINANCING ACTIVITIES
Financing activities were a net use of funds representing $323.6 million, 
$307.8 million and $72.4 million for fiscal 1997, 1996 and 1995, 
respectively. Dividend payments for the three years were $80.7 million, $76.3 
million and $65.1 million. Improved operating earnings and cash generation 
opportunities allowed the company to increase dividends paid year-over-year.

     During the second quarter of fiscal 1996, the "Old" Morton 
International, Inc. Board of Directors authorized a 10 million share buyback 
of the company's common stock.  This buyback was completed during fiscal 1997 
and the Board of Directors, in April 1997, authorized the company to 
repurchase an additional 10 million shares of the company's common stock. 
During fiscal 1997, the company repurchased 6.5 million shares of its common 
stock for $234.9 million.  In fiscal 1996, the company repurchased 6.7 
million shares at a cost of $242.3 million.  At June 30, 1997, the company 
was authorized to repurchase up to 6.8 million additional shares.

     Short-term notes payable decreased $23.1 million, $1.1 million and $10.4 
million in 1997, 1996 and 1995. This reflected the lower level of short-term 
borrowing required as cash generated from operations increased, including the 
funds transferred from the Spinoff transactions described in the Notes to 
Consolidated Financial Statements.

     DISCONTINUED OPERATIONS
Net transfers from discontinued operations were a source of cash of
$806.8 million in fiscal 1997, $141.8 million in 1996 and $22.4
million in 1995.  Fiscal 1997 included the $750.0 million tax-free
capital contribution to "New" Morton as part of the Spinoff
agreement.  

     OTHER
The company's current ratio was 2.7 at June 30, 1997 and 1.9 at
June 30, 1996.  Total debt as a percentage of total capitalization
was 12.6 percent at June 30, 1997, compared to 13.0 percent at June
30, 1996.

     As of June 30, 1997, the company had unexpended authorizations
for fixed asset and maintenance projects totaling $103.4 million.
The authorizations related primarily to chemical facility
expansion, product improvements, and maintenance on a company-wide
basis.

     Estimated cash flow from operations and current financial
resources, including financing capacity, are expected to be
adequate to fund the company's anticipated working capital
requirements, fixed asset spending, dividend payments, business
acquisitions and share repurchases in the foreseeable future.

-------------------------------------------------------------------
IMPACT OF INFLATION

Inflation generally has not had a significant impact upon the results of the 
company's operations in recent years. Historically, the company has taken 
steps to reduce the effects of inflation on its business. In periods of 
increasing prices, to the extent permitted by competition, the company has 
adjusted its selling prices to compensate for increased costs.

     An ongoing cost control program implemented throughout the company also 
has contributed to reducing the influence of inflationary costs. Further, a 
continuing program of investment in new and more efficient facilities, 
production processes and productivity enhancements has made a significant 
contribution in offsetting inflation.

     The company uses the LIFO method of accounting for its domestic 
inventories. Under this method the cost of products sold, as reported in the 
financial statements, approximates current costs.

-------------------------------------------------------------------
ENVIRONMENTAL MATTERS   

For a detailed discussion, see Environmental Matters on page 36 included in 
the Notes to Consolidated Financial Statements. 


24
<PAGE>

CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>

                                                               Year ended June 30        
                                                   ---------------------------------------
in millions, except per share data                    1997           1996           1995 
------------------------------------------------------------------------------------------
<S>                                                <C>            <C>            <C>
Net sales                                          $2,340.6       $2,215.0       $2,099.6
Interest, royalties and sundry income                  47.6           73.2           26.3 
                                                   ---------      ---------      ---------
                                                    2,388.2        2,288.2        2,125.9
Deductions from income                                               
  Cost of products sold                             1,580.3        1,517.7        1,424.1
  Selling, administrative and general expense         378.5          361.1          361.4
  Research and development expense                     58.8           60.2           58.1 
  Interest expense                                     25.6           24.4           28.4 
  Amortization of goodwill                             11.2           10.3           10.3 
  Special charges                                         -           29.2              - 
                                                   ---------      ---------      ---------                
                                                    2,054.4        2,002.9        1,882.3   
                                                   ---------      ---------      ---------
Income from continuing operations                                                   
  before income taxes                                 333.8          285.3          243.6     
Income taxes                                          120.2          106.6           90.9 
                                                   ---------      ---------      ---------
Income from continuing operations                     213.6          178.7          152.7     
Income from discontinued operations,                                                
 net of applicable income taxes                       129.4          155.5          141.4 
                                                   ---------      ---------      ---------
Net income                                         $  343.0       $  334.2       $  294.1     
                                                   ---------      ---------      ---------
Income per common and common equivalent share:                                                
  Income from continuing operations                $   1.48       $   1.20       $   1.02 
  Income from discontinued operations                   .90           1.04            .94 
                                                   ---------      ---------      ---------  
  Net income                                       $   2.38       $   2.24       $   1.96 
                                                   ---------      ---------      ---------
</TABLE>


See notes to consolidated financial statements.


25
<PAGE>

CONSOLIDATED BALANCE SHEETS      
<TABLE>
<CAPTION>
                                                                                      June 30
                                                                          ----------------------------
in millions                                                                  1997              1996
------------------------------------------------------------------------------------------------------
<S>                                                                       <C>               <C>
ASSETS

CURRENT ASSETS  
  Cash and cash equivalents                                               $  430.3          $   68.9
  Receivables, less allowances of $11.7 and $10.3                            466.4             367.8
  Deferred income tax benefits                                                13.7              14.8
  Inventories                                                                351.6             294.8
  Prepaid expenses                                                           128.0             112.7 
                                                                          ---------         ---------
               Total Current Assets                                        1,390.0             859.0
                                                                          ---------         ---------
OTHER ASSETS
  Cost in excess of net assets of businesses acquired,
       less amortization                                                     338.4             296.3
  Investments in affiliates                                                   91.5              66.9
  Miscellaneous                                                              105.9              61.3
  Net assets of discontinued Automotive Safety Products
       operations                                                                -             635.1
                                                                          ---------         ---------
                                                                             535.8           1,059.6
                                                                          ---------         ---------
                                                                                    
PROPERTY, PLANT AND EQUIPMENT
  Land                                                                       102.5              32.4
  Buildings and improvements                                                 461.3             434.9
  Machinery and equipment                                                  1,061.7             920.3
  Construction in progress                                                    87.0              89.0
                                                                          ---------         ---------
                                                                           1,712.5           1,476.6
  Less allowances for depreciation                                           833.4             766.1
                                                                          ---------         ---------
                                                                             879.1             710.5
                                                                          ---------         ---------
                                                                          $2,804.9          $2,629.1
----------------------------------------------------------------------    ---------         ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
  Notes payable and current portion of long-term debt                     $   32.7          $   37.2 
  Accounts payable                                                           255.9             202.8 
  Accrued salaries, wages and other compensation                              58.4              53.5 
  Other accrued expenses                                                     156.2             120.9 
  Income taxes                                                                19.9              29.1 
                                                                          ---------         ---------
               Total Current Liabilities                                     523.1             443.5
                                                                          ---------         ---------
                                                                                    
NONCURRENT LIABILITIES
  Long-term debt, less current portion                                       224.1             218.5
  Deferred income taxes                                                       46.0              36.6
  Accrued postretirement benefits other than pensions                        156.0             149.1
  Other noncurrent liabilities                                               121.4             108.6
                                                                          ---------         ---------
               Total Noncurrent Liabilities                                  547.5             512.8
                                                                          ---------         --------- 
SHAREHOLDERS' EQUITY
  Preferred stock (par value $1.00 per share)
    Authorized - 25.0 shares, none issued
  Common stock (par value $1.00 per share)
    Authorized-500.0 shares and 300.0 shares in 1997 and 1996
    Issued-140.1 shares and 148.4 shares in 1997 and 1996                    140.1             148.4 
  Additional paid-in capital                                                    .3              55.9 
  Retained earnings                                                        1,706.0           1,675.5 
  Foreign currency translation adjustment and other                          (16.8)             11.0 
                                                                          ---------         ---------
                                                                           1,829.6           1,890.8
  Less cost of common stock in treasury-3.0 shares and 6.0 shares         
    in 1997 and 1996                                                          95.3             218.0
                                                                          ---------         ---------
               Total Shareholders' Equity                                  1,734.3           1,672.8
                                                                          ---------         ---------
                                                                          $2,804.9          $2,629.1
------------------------------------------------------------------------  ---------         ---------
</TABLE>

See notes to consolidated financial statements.


26
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                               Cash provided (used)         
                                                                                Year ended June 30           
                                                                  --------------------------------------------
in millions                                                           1997             1996              1995 
--------------------------------------------------------------------------------------------------------------
<S>                                                               <C>              <C>               <C>
OPERATING ACTIVITIES
  Income from continuing operations                               $  213.6         $  178.7          $  152.7
  Adjustments to reconcile net income to net cash                                             
    provided by operating activities:                                                              
      Depreciation and amortization                                  116.0            102.9              97.4 
      Deferred income taxes                                            5.8              2.7               2.4  
      Undistributed earnings of affiliates                            (7.5)            (4.8)             (4.0)
      Special charges                                                    -             29.2                 - 
      Changes in operating assets and liabilities                                             
        net of effects of businesses acquired:                                                
            Receivables                                               (7.9)           (16.0)            (20.6)
            Inventories and prepaid expenses                         (15.6)               -             (47.7)
            Accounts payable and accrued expenses                     10.2            (27.0)             25.7
            Income taxes                                             (15.7)            10.4               2.2  
            Other-net                                                 (7.6)            (5.8)              2.1  
                                                                  ---------        ---------         ---------
               Net cash provided by operating activities             291.3            270.3             210.2
                                                                  ---------        ---------         ---------
                                           
INVESTING ACTIVITIES
  Purchase of property, plant and equipment                         (117.4)          (124.4)           (126.4)
  Proceeds from property and other asset disposals                     8.9              4.3               2.2  
  Net cash invested in businesses acquired                          (309.5)             (.6)            (12.7)
  Other                                                               (2.2)            (1.7)             (1.4)
                                                                  ---------        ---------         ---------
               Net cash used for investing activities               (420.2)          (122.4)           (138.3)
                                                                  ---------        ---------         ---------

FINANCING ACTIVITIES
  Purchase of common stock for treasury                             (234.9)          (242.3)                - 
  Net repayment of short-term borrowings                             (23.1)            (1.1)            (10.4)
  Repayment of long-term debt                                          (.1)               -             (22.2)
  Long-term borrowings                                                   -                -              19.9 
  Stock option transactions                                           15.2             11.9               5.4  
  Dividends paid                                                     (80.7)           (76.3)            (65.1)
                                                                  ---------        ---------         ---------
               Net cash used for financing activities               (323.6)          (307.8)            (72.4)
                                                                  ---------        ---------         ---------

DISCONTINUED OPERATIONS 
  Net transfer from discontinued operations                          806.8            141.8              22.4 
                                                                  ---------        ---------         ---------
Effect of foreign exchange rate changes on cash                                               
 and cash equivalents                                                  7.1             (1.3)              7.7  
                                                                  ---------        ---------         ---------
Increase (decrease) in cash and cash equivalents                     361.4            (19.4)             29.6
Cash and cash equivalents at beginning of year                        68.9             88.3              58.7 
                                                                  ---------        ---------         ---------
Cash and cash equivalents at end of year                          $  430.3         $   68.9          $   88.3 
---------------------------------------------------------------   ---------        ---------         ---------
</TABLE>

See notes to consolidated financial statements.       


27
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


SPINOFF AND BASIS OF PRESENTATION

On April 24, 1997, the shareholders of the current Morton International, 
Inc.'s predecessor ("Old Morton") approved the Spinoff of its specialty 
chemicals and salt businesses (the "Spinoff") and the combination of Old 
Morton's automotive safety products business ("ASP") with the businesses of 
Autoliv AB (the "Combination"), pursuant to the Combination Agreement, dated 
as of November 25, 1996, by and among Old Morton, Autoliv AB, Autoliv, Inc., 
a newly formed corporation ("Autoliv"), and ASP Merger Sub, Inc.  In 
connection with the Spinoff, Old Morton contributed its specialty chemicals 
and salt businesses and corporate operations, together with $750 million of 
cash, to New Morton International, Inc. ("New Morton"), a newly formed 
subsidiary of Old Morton.

    On April 30, 1997, all of the outstanding shares of New Morton were 
distributed to Old Morton shareholders on a basis of one New Morton share for 
each Old Morton share held by such shareholders. On May 1, 1997, the 
Combination became effective, and each outstanding Old Morton share was 
converted into the right to receive .341 of a share of Autoliv, a holding 
company which now holds ASP and in excess of 90 percent of the outstanding 
capital stock of Autoliv AB.  The Spinoff and the Combination were tax free 
under United States law to Old Morton and its shareholders (other than with 
respect to cash received in lieu of fractional shares of Autoliv, Inc.).  
Immediately after the Combination, New Morton was renamed Morton 
International, Inc. ("the company").  

    Consolidated results of continuing operations, financial position and 
cash flows in the accompanying financial statements and the disclosures in 
these notes refer to the continuing salt, specialty chemicals and corporate 
operations of the company.  The net assets and results of operations of the 
ASP business are reflected in the accompanying financial statements as 
discontinued operations.

    For the purposes of governing certain relationships among Old Morton, the 
company and Autoliv, as well as to help in the orderly separation and 
transition of the ASP business, the company, Old Morton and Autoliv have 
entered into certain agreements relating to, among other things, (a) the 
separation of ASP from the remaining businesses of Old Morton; (b) 
transitional services to be provided by the company to ASP after the 
Combination; (c) the sharing of certain facilities for a limited time by ASP 
and the company; and (d) the allocation of certain tax, employee benefits and 
other liabilities among Old Morton, Autoliv and the company. 

NATURE OF OPERATIONS

The company is an international organization engaged in the manufacture and 
marketing of specialty chemicals and salt. Specialty Chemicals is the largest 
segment, accounting for 72 percent of fiscal 1997 sales.  Its major markets 
include general industrial, packaging, construction, automotive, electronics, 
paper and printing, textiles and petroleum.  Chemical products are sold 
primarily in North America and Europe but with growing activity in Japan and 
Southeast Asia.  The Salt segment contributed 28 percent of 1997 sales.  It 
serves major North American and European salt markets with a complete line of 
products.  

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION
Investments in 50 percent or less owned companies and joint ventures, where 
the company does not effectively control the entity, are carried on the 
equity basis.  All intercompany accounts and transactions have been 
eliminated from the consolidated financial statements.  

CASH EQUIVALENTS
The company considers all highly liquid investment instruments purchased with 
a maturity of three months or less to be cash equivalents.

INVENTORIES
Inventories are stated at the lower of cost or market.  The cost of domestic 
inventories (56 percent and 66 percent of consolidated inventories at June 
30, 1997 and 1996) is determined by the last-in, first-out (LIFO) method, 
while the cost of foreign inventories is determined by the first-in, 
first-out (FIFO) method.  If the FIFO method, which approximates replacement 
cost, had been used for all inventories, the total amount for inventories 
would have been increased by $34.8 million and $36.8 million at June 30, 1997 
and 1996.

INTANGIBLE ASSETS
Cost in excess of net assets of businesses acquired and other intangibles are 
being amortized on a straight-line basis over periods not exceeding 40 years. 
The amount of accumulated amortization related to intangibles, primarily 
goodwill, recorded as of June 30, 1997 and 1996, was $145.6 million and 
$131.9 million.

PROPERTY, PLANT AND EQUIPMENT
The company provides for depreciation of property, plant and equipment, all 
of which are recorded at cost, by annual charges to income, computed 
primarily under the straight-line method.

FOREIGN CURRENCY TRANSLATION 
All assets and liabilities in the balance sheet of foreign subsidiaries whose 
functional currency is other than the U.S. dollar are translated at year-end 
exchange rates except shareholders' equity, which is translated at historical 
rates. Translation gains and losses are accumulated as a separate component 
of shareholders' equity.  Foreign currency transaction gains and losses are 
included in determining net income.

FOREIGN EXCHANGE CONTRACTS
The company uses forward foreign exchange contracts primarily to offset the 
effects of foreign currency fluctuations related to firm and anticipated 
foreign denominated receivables and payables transactions, intercompany 
financing transactions and dividends from subsidiaries.  The company may also 
use forward foreign exchange contracts to offset the currency fluctuation 
related to 


28
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


foreign currency denominated debt.  The company nets its exposures before 
entering into hedge transactions.  Generally, contracts do not exceed one 
year.  Gains or losses on forward foreign exchange contracts that hedge an 
identifiable foreign currency commitment or exposure are deferred and 
recognized as the related transactions are settled.  Gains or losses on all 
other forward foreign exchange contracts are recognized as incurred in 
determining net income.  Exchange gains (losses) recorded on these forward 
contracts in 1997, 1996 and 1995 were $1.2 million, $1.6 million and $(2.2) 
million. Outstanding forward foreign exchange contracts at June 30, 1997, 
were valued at year-end foreign exchange rates, with the changes in 
valuations reflected directly in net income.

USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted 
accounting principles requires management to make estimates and assumptions 
that affect the amounts reported in the financial statements and accompanying 
notes. Actual results could differ from those estimates.

QUARTERLY RESULTS
Quarterly results are presented on page 2 of the annual report.

DISCONTINUED OPERATIONS

As a result of the Spinoff, results for prior years have been restated to 
reflect ASP as a discontinued operation for all years presented.  The results 
reported below include allocations of certain company assets (including 
pension assets), liabilities (including pension and postretirement benefits) 
and expenses relating to ASP that were transferred to ASP.  The company also 
provided certain general administrative services including legal management, 
tax compliance, risk management and other corporate services to ASP.  The 
costs of these services is not material and has not been included in the cost 
and expenses of discontinued operations.

    The operating results of the discontinued ASP business are as follows: 

<TABLE>
<CAPTION>
                                         Ten months
                                           ended                  Year ended June 30 
                                          April 30,            ------------------------   
in millions                                 1997                 1996             1995
---------------------------------------------------------------------------------------
<S>                                      <C>                   <C>             <C>
Net sales                                  $1,249.2            $1,397.5        $1,226.3
Interest, royalties and sundry 
   income (loss)                                (.9)                2.2             2.7
                                           ---------           ---------       ---------
                                            1,248.3             1,399.7         1,229.0

Cost of products sold                         946.3             1,048.6           924.7
Selling, administrative and 
   general expense                             77.8                75.3            63.0
Research and development                       12.5                20.0            14.4
Interest expense                                2.3                 1.9               - 
                                           ---------           ---------       ---------
                                            1,038.9             1,145.8         1,002.1
                                           ---------           ---------       ---------
Income before income taxes                    209.4               253.9           226.9
Income taxes                                   80.0                98.4            85.5
                                           ---------           ---------       ---------
Net income                                 $  129.4            $  155.5        $  141.4
                                           ---------           ---------       ---------
                                           ---------           ---------       ---------
</TABLE>

    Summarized balance sheet data at June 30, 1996, for the discontinued ASP 
business is as follows: 

in millions 
--------------------------------------------------------
Receivables, less allowances                     $199.9 
Recoverable design and 
  preproduction costs                              56.9 
Inventories                                        69.7 
Refundable and deferred tax
   benefits                                         8.8 
Property, plant and equipment, net                435.3 
Accounts payable                                  (93.8)
Other                                             (41.7)
                                                 -------
Net assets                                       $635.1 
                                                 -------
                                                 -------


ACQUISITIONS

In December 1996, Morton signed a definitive agreement to acquire 
approximately two-thirds of the stock of Compagnie des Salins du Midi et des 
Salines de l'Est ("Salins du Midi").  A subsidiary of Morton acquired 
two-thirds of the stock in March 1997, made a public cash tender offer in 
France for the remaining shares, and as of June 30, 1997, owned 100 percent 
of Salins du Midi for a total cost of $268.9 million.  Salins du Midi is the 
leading independent salt producer in France. Based in Paris, Salins du Midi 
supplies salt for food and agricultural products, water treatment and 
ice/snow and industrial applications, and markets its products under the "La 
Baleine" label. Salins du Midi produces solar, rock and vacuum-processed salt 
at nine sites in France and at four sites in Spain as well as other locations.

    In December 1996, rights to acquire 90 percent of the outstanding stock 
of Pulverlac S.p.A. ("Pulverlac"), an Italian powder coatings maker, was 
purchased for $66.3 million with rights to later acquire the remaining 10 
percent. Pulverlac is a leader in the European powder coatings industry.

    These acquisitions consisted principally of values for property, plant 
and equipment of $153.0 million, working capital of $50.5 million, and 
intangibles of $63.7 million (primarily goodwill). Since the acquisitions 
were recently completed, finalization of the allocation of the purchase price 
of certain assets and liabilities is subject to completion.  The accounts and 
results of operations since acquisition of the companies have been included 
in the accompanying consolidated balance sheet at June 30, 1997, and the 
statement of income for the year then ended.  Assuming the acquisitions had 
been effective as of July 1, 1995, unaudited pro forma data for the years 
ended June 30, 1997 and 1996 would not be materially different in relation to 
consolidated results presented herein.

29
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


SPECIAL CHARGES

During the fourth quarter of fiscal 1996, the company recorded special pretax 
charges of $29.2 million ($23.9 million after tax or $.16 per share).  The 
charges included amounts related to the early adoption of the accounting 
standard related to impairment of long-lived assets and the costs related to 
selected facility rationalizations and employee terminations resulting from 
the reorganization of the specialty chemicals operations.

    During fiscal 1996, the company adopted Financial Accounting Standards 
Board (FASB) Statement No. 121, "Accounting for the Impairment of Long-Lived 
Assets and for Long-Lived Assets to be Disposed Of."  This statement requires 
impairment losses to be recognized for long-lived assets used in operations 
when indicators of impairment are present and the undiscounted cash flows 
estimated to be generated by those assets are less than the assets' carrying 
amounts.  Statement No. 121 also addresses the accounting for long-lived 
assets that are expected to be disposed.

    In applying the criteria of FASB Statement No. 121, the company 
determined that the significant reduction in the defense-related business of 
its chemical vapor deposition product line and the resulting negative impact 
on income in recent years were indicators of potential impairment.  
Accordingly, the company evaluated the ongoing value of long-lived assets 
associated with this product line in accordance with the provisions of FASB 
Statement No. 121. Based on this evaluation, the company determined that an 
impairment did exist and recorded an impairment loss of $15.8 million to 
write these assets down to their fair value.  Fair value was based on 
estimated future cash flows to be generated by this product line, discounted 
at a rate commensurate with the risk involved.  No tax benefit was recorded 
related to this charge.

    During the second quarter of fiscal 1996, the company consolidated two of 
its chemical groups to concentrate resources, streamline operations and 
better position itself to achieve its strategic growth objectives. 

    Related to this action, the company recorded a pretax charge of $11.3 
million in the fourth quarter for the planned closure of three domestic 
chemical facilities and a European sales office as well as the elimination of 
certain duplicate management and administrative positions.  Operations at the 
facilities to be exited are being transferred to other existing facilities.  

    Components of the one-time charge included $3.0 million related to the 
disposal of the facilities mentioned above, $4.9 million related to the 
write-down to net realizable value of certain manufacturing equipment and 
$3.4 million related to employee termination costs.  These actions are 
expected to be finalized in fiscal year 1998 and, when completed, are 
expected to generate estimated annual savings of $8.5 million.  

    In addition, in the fourth quarter of fiscal 1996 the company recorded a 
pretax charge of $2.1 million to write-down to current estimated realizable 
value certain corporate assets held for sale.

INVENTORIES

Components of inventories were as follows:
                                                         June 30      
                                                -----------------------
in millions                                      1997              1996
------------------------------------------------------------------------
Finished products and work-in-process           $271.8           $221.7
Materials and supplies                            79.8             73.1 
                                                -------          -------
                                                $351.6           $294.8
                                                -------          -------
                                                -------          -------


FINANCING ARRANGEMENTS

The company has committed credit agreements with banks that will expire in 
April 1998 and April 2002.  In addition, lines of credit are available from 
domestic and foreign banks that generally do not have termination dates but 
are reviewed annually for renewal.  Under these arrangements, the company may 
borrow upon such terms and conditions as the company and the banks may 
mutually agree.  At June 30, 1997, such credit facilities amounted to 
approximately $512.6 million, and the unused portions thereof were 
approximately $482.8 million.  

     Long-term debt consisted of the following:

                                                             June 30     
                                                 ------------------------------
in millions                                        1997                   1996
-------------------------------------------------------------------------------
Credit Sensitive Debentures (net of
  unamortized discount of $1.3 and $1.4)         $198.7                 $198.6
Other                                              28.3                   20.0
                                                 -------                -------
                                                  227.0                  218.6
Less current portion                                2.9                     .1
                                                 -------                -------
                                                 $224.1                 $218.5
                                                 -------                -------
                                                 -------                -------


    The Credit Sensitive Debentures ("Debentures") due June 1, 2020, are 
unsecured obligations of the company.  The Debentures had an initial 
effective interest rate of 9.335 percent, subject to adjustment on the 
calendar day that certain changes in the debt rating of the Debentures occur, 
as determined by Standard & Poor's Corporation or Moody's Investor Service.  
No adjustment of the initial effective interest rate has occurred.

    The aggregate maturities of long-term debt through June 30, 2002, total 
$8.2 million.  Interest paid on borrowings in 1997, 1996 and 1995 was $26.6 
million, $24.0 million and $28.2 million.

    Notes payable at June 30, 1997 and 1996, reflected borrowings from banks 
at average interest rates of 5.5 percent and 3.8 percent.


30
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


FAIR VALUES OF FINANCIAL INSTRUMENTS

The following methods were used by the company to estimate its fair value 
disclosures for financial instruments.

CASH AND CASH EQUIVALENTS
The carrying amount reported in the balance sheet for cash and cash 
equivalents approximates its fair value.

NOTES PAYABLE AND LONG-TERM DEBT
The carrying amount of the company's borrowings in the form of notes payable 
approximates its fair value.  The fair value of the company's long-term debt 
is estimated using discounted cash flow analyses, based on the company's 
current incremental borrowing rates for similar types of borrowing 
arrangements.

FOREIGN CURRENCY EXCHANGE CONTRACTS
Forward foreign exchange contracts that hedge foreign currency exposures or 
transactions are valued at current foreign exchange rates.  

    The carrying or notional amounts and fair values of the company's 
financial instruments at June 30, 1997, were as follows: 

                                          Carrying or
                                            notional           Fair
in millions                                  amount            value 
--------------------------------------------------------------------------  
Notes payable                                $ 29.8           $ 29.8
Long-term debt                                227.0            269.9
Forward foreign exchange contracts            103.9            108.5  


INCOME TAXES 

The provisions for income taxes for continuing operations, were as follows:

in millions                           1997           1996          1995 
-------------------------------------------------------------------------
Current:
  Federal                            $ 55.3         $ 55.2        $ 39.3
  State                                12.0           11.6           8.4
  Foreign                              47.1           37.1          40.8
                                     -------        -------       -------
                                      114.4          103.9          88.5
                                     -------        -------       -------
                                     -------        -------       -------
Deferred:
  Federal                               2.9            1.5           1.8
  State                                 1.4             .9            .5
  Foreign                               1.5             .3            .1
                                     -------        -------       -------
                                        5.8            2.7           2.4
                                     -------        -------       -------
                                     $120.2         $106.6        $ 90.9
                                     -------        -------       -------
                                     -------        -------       -------

    A reconciliation of the United States statutory rate to the effective 
income tax rate for continuing operations follows:

                                       1997          1996           1995
--------------------------------------------------------------------------
Statutory rate                         35.0%         35.0%          35.0%
Effect of:
  State tax, net of federal 
    tax benefit                         2.6           2.8            2.4
  Impairment loss on long-lived
    assets                                -           1.9              -
  Depletion                            (1.9)         (2.1)          (2.3)
  Net foreign items                      .1          (1.4)            .6
  Other                                  .2           1.2            1.6
                                     -------        -------       -------
Effective rate                         36.0%         37.4%          37.3%
                                     -------        -------       -------
                                     -------        -------       -------

    Deferred income taxes reflect the impact of temporary differences between 
the valuation of assets and liabilities for financial reporting and their tax 
bases.  Significant components of the company's deferred tax balances were as 
follows: 

                                                                   June 30    
                                                           ---------------------
in millions                                                  1997          1996
--------------------------------------------------------------------------------
Deferred tax benefits related to:
  Postretirement and postemployment benefits               $ 65.5        $ 60.8
  Accrual for environmental liabilities                      15.0          14.9
  Other                                                      67.1          74.0
                                                           -------       -------
                                                            147.6         149.7
                                                           -------       -------
                                                           -------       -------

Deferred tax liabilities related to:
  Tax over book depreciation                                 90.5          77.1
  Pension                                                    34.4          34.8
  Other                                                      59.7          65.8
                                                           -------       -------
                                                            184.6         177.7
                                                           -------       -------
Net deferred tax liability                                 $ 37.0        $ 28.0
                                                           -------       -------
                                                           -------       -------

    No individual item included in other deferred tax benefits or deferred 
tax liabilities above is material.  Deferred income tax benefits at June 30, 
1997 and 1996, included $4.7 million and $6.2 million of refundable income 
taxes.

    Total income tax payments related to the company (including ASP) during 
fiscal 1997, 1996 and 1995 were $167.4 million, $189.2 million and $165.0 
million. 

    Components of the company's income from continuing operations before 
income taxes were as follows: 

in millions                      1997         1996         1995
-----------------------------------------------------------------
Domestic                        $213.2       $176.8       $139.4
Foreign                          120.6        108.5        104.2
                                -------      -------      -------
                                $333.8       $285.3       $243.6
                                -------      -------      -------
                                -------      -------      -------

    The Internal Revenue Service has completed its examination of Old 
Morton's consolidated federal income tax returns through fiscal 1992, and all 
issues, which were not significant individually or in the aggregate, have 
been settled.


31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


SHAREHOLDERS' EQUITY

Changes in shareholders' equity are summarized below:
<TABLE>
<CAPTION>
                                                                                                         Foreign
                                                                                                         currency
                                                  Common stock          Additional                      translation
                                               ------------------         paid-in        Retained        adjustment        Treasury
in millions                                    Shares      Amount         capital        earnings        and other          stock
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>        <C>           <C>              <C>            <C>                <C>
Balance June 30, 1994                           147.6     $  147.6      $    53.0        $ 1,188.6      $    10.4          $     -
 Net income                                         -            -              -            294.1              -                -
 Cash dividends paid, $.44 per share                -            -              -            (65.1)             -                -
 Exercise of stock options and related                                                                                            
   income tax benefits                             .7           .7            8.7                -              -                -
 Translation adjustment                             -            -              -                -           25.1                -
 Other                                              -            -             .5                -            (.1)               -
                                                ------    ---------     ----------       ----------     ----------         --------
Balance June 30, 1995                           148.3        148.3           62.2          1,417.6           35.4                -
 Net income                                         -            -              -            334.2              -                -
 Cash dividends paid, $.52 per share                -            -              -            (76.3)             -                - 
 Exercise of stock options and related                                                                                            
   income tax benefits                             .1           .1           (6.3)               -              -             24.3
 Translation adjustment                             -            -              -                -          (24.6)               -
 Purchase of common stock for treasury              -            -              -                -              -           (242.3)
 Other                                              -            -              -                -             .2                -
                                                ------    ---------     ----------       ----------     ----------         --------
Balance June 30, 1996                           148.4        148.4           55.9          1,675.5           11.0           (218.0)
 Net income                                         -            -              -            343.0              -                -
 Cash dividends paid, $.57 per share                -            -              -            (80.7)             -                -
 Exercise of stock options and related                                                                                           
   income tax benefits                             .1           .1          (11.5)               -            (.3)            36.1
 Translation adjustment                             -            -              -                -          (26.4)               -
 Purchase of common stock for treasury              -            -              -                -              -           (234.9)
 Elimination of treasury stock(1)                (8.4)        (8.4)         (44.1)          (269.0)             -            321.5
 Disposal of business operations(2)                 -            -              -             37.2           (1.1)               -
                                                ------    ---------     ----------       ----------     ----------         --------
Balance June 30, 1997                           140.1     $  140.1      $      .3        $ 1,706.0      $   (16.8)         $ (95.3)
                                                ------    ---------     ----------       ----------     ----------         --------
                                                ------    ---------     ----------       ----------     ----------         --------
</TABLE>

(1)  In connection with the Spinoff, 8.4 million shares of treasury stock 
     were canceled without payment of consideration therefor, resulting in 
     reductions of common stock, additional paid-in capital and retained 
     earnings, and the elimination of treasury stock.                         
                       

(2)  Retained earnings were decreased to reflect the divestiture of the 
     net assets of ASP, increased by the cash received by the company as part 
     of the Spinoff, and decreased to reflect the elimination of intercompany 
     indebtedness of the ASP business and the liability for the company's 
     portion of expenses in connection with the Spinoff.

    In October 1995, Old Morton's Board of Directors authorized the 
repurchase of up to 10 million shares of Old Morton's common stock on the 
open market.  During fiscal 1997 and 1996, 3.3 million shares and 6.7 million 
shares were repurchased.  In April 1997, the company's Board of Directors 
authorized the repurchase of up to 10 million additional shares of the 
company's common stock.  During fiscal 1997, 3.2 million shares were 
repurchased on the open market.

    In March 1997, the company declared a dividend distribution of one 
preferred share purchase right (the "Rights") for each outstanding common 
share, paid in connection with the Spinoff. Until exercisable, the Rights 
will not be transferable apart from the company's common stock.  Each Right 
entitles its holder to buy one one-hundredth of a share of the company's 
Series A Junior Participating Preferred Stock at an exercise price of $105 
per one one-hundredth of a share of preferred stock.  The Rights will only 
become exercisable if a person or group acquires or makes an offer to acquire 
20 percent or more of the company's common stock.  In the event the company 
is acquired in a merger, each Right entitles the holder to purchase common 
stock of the surviving company having a market value of twice the exercise 
price of the Rights. In the event any person or group acquires 20 percent or 
more of the company's common stock (which the company's Board of Directors 
may reduce to 10 percent), each Right entitles the holder (other than such 
acquirer) to purchase common stock of the company having a market value of 
twice the exercise price of the Right.  The Rights may be redeemed by the 
company at the price of one cent per Right prior to the acquisition of 20 
percent of the outstanding shares of the company's common stock.  At June 30, 
1997, 1.6 million shares of preferred stock were reserved for future 
exercises of the Rights. 


32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


BENEFIT PLANS

PENSIONS
The company has noncontributory defined benefit pension plans covering 
employees at most domestic operations.  The benefits are based on an average 
of the employee's earnings in the years preceding retirement and on credited 
service.  Certain supplemental unfunded plan arrangements also provide 
retirement benefits to specified groups of participants.  Most international 
subsidiaries also have retirement plans. 

    The company's funding policy for domestic plans is to contribute amounts 
sufficient to meet the minimum funding requirements of the Employee 
Retirement Income Security Act of 1974, plus any additional amounts which the 
company may determine to be appropriate. 

    The actuarially computed portion of net pension expense for Old Morton's 
sponsored pension plans allocated to the company consisted of the following 
components:  

<TABLE>
<CAPTION>

in millions                               1997              1996               1995
------------------------------------------------------------------------------------
<S>                           <C>        <C>     <C>       <C>      <C>       <C>
Service cost-benefits earned 
 during the year                         $15.4             $15.0              $13.8
Interest cost on projected                  
 benefit obligation                       38.3              35.8               33.2
Return on plan assets:
   Actual                      $(103.9)           $(79.9)            $(58.1)
   Deferred portion               57.7              38.6               19.9 
                               --------           -------            -------
     Expected return                     (46.2)            (41.3)             (38.2)
Net amortization                           1.1               2.9                1.5 
                                         ------            ------             ------
Net pension expense                      $ 8.6             $12.4              $10.3 
                                         ------            ------             ------
                                         ------            ------             ------
</TABLE>

The reconciliation of the funded status of pension plans was as follows:

<TABLE>
<CAPTION>

                                                           June 30, 1997                              June  30, 1996          
                                                ------------------------------------      --------------------------------------
                                                 Plans in which      Plans in which        Plans in which        Plans in which
                                                 assets exceed        accumulated          assets exceed          accumulated
                                                   accumulated          benefit              accumulated             benefit
                                                     benefit           obligation              benefit             obligation
in millions                                        obligation        exceeds assets          obligation          exceeds assets 
--------------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>                 <C>                    <C>                  <C>
Plan assets at fair value                            $620.1              $11.4                $523.4                $  -  
                                                     -------             ------               -------               -------
Actuarial present value of projected
  benefit obligations:
    Accumulated benefit obligation
      Vested                                          416.3               46.4                 382.2                  20.5 
      Non-vested                                       24.6                 .1                  21.2                    .1
    Provision for future salary increases              85.3                7.2                  71.5                   6.2   
                                                     -------             ------               -------               -------
                                                      526.2               53.7                 474.9                  26.8   
                                                     -------             ------               -------               -------
Plan assets in excess of (less than) 
  projected benefit obligation                         93.9              (42.3)                 48.5                 (26.8)
Unrecognized net experience loss 
  since July 1, 1986                                   24.0               11.0                  56.4                  11.5
Prior service cost not yet recognized
  in net pension cost                                   (.3)               1.9                   (.6)                  2.3
Unrecognized net (asset) obligation 
  at July 1, 1986                                     (19.5)                .6                 (23.4)                   .8
Adjustment to recognize minimum liability                 -               (7.8)                    -                  (8.4)
                                                     -------             ------               -------               -------
Net pension asset (liability) recognized         
  in the consolidated balance sheets                 $ 98.1              $(36.6)              $ 80.9                $(20.6)
                                                     -------             ------               -------               -------
                                                     -------             ------               -------               -------
</TABLE>


33
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


    The weighted averages of assumptions used in the determination of the 
projected benefit obligation were:

                                                     1997      1996      1995
------------------------------------------------------------------------------
Discount rate                                        7.4%      7.8%      7.6%
Rate of increases in compensation level              4.8%      4.9%      4.9%
Expected long-term rate of return on assets          9.5%      9.5%      9.5%

    The assets of the company-sponsored plans are invested primarily in 
equities and bonds.  

    Certain pension plans contain restrictions on the use of excess pension 
plan assets in the event of a change in control of the company.
  
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The company currently provides postretirement health care and life insurance 
benefits to most U.S., Canadian and French retirees.  In general, the terms 
of the plans provide that U.S. employees who retire after attaining age 55 
with five years of service are eligible for continued health care and life 
insurance coverage.  Dependent health care and life insurance coverage are 
also available.  Most retirees contribute toward the cost of health care 
coverage, with the contributions generally varying based on service.  In June 
1993, a provision was adopted which caps the level of subsidy at the amount 
in effect as of the year 2000 for most U.S. employees who retire after 
December 31, 1992. In general, most Canadian employees who retire after 
attaining age 55 and are entitled to a pension benefit are eligible for 
continued retiree health and life insurance coverage.  Dependent health 
insurance is also generally available.  The benefits are provided on a 
noncontributory basis.  In France, the company pays a portion of retiree 
insurance premiums to cover health care costs in excess of those reimbursed 
by social security.

Net periodic postretirement benefit cost included the following components:

in millions                                        1997      1996      1995
---------------------------------------------------------------------------
Service cost-benefits earned during the year      $ 1.8     $ 1.9     $ 1.8
Interest cost on accumulated postretirement 
     benefit obligation                            10.4      10.6      10.8
Net amortization                                   (1.2)      (.8)      (.8) 
                                                  ------    ------    ------
Net periodic postretirement benefit cost          $11.0     $11.7     $11.8 
                                                  ------    ------    ------
                                                  ------    ------    ------

    At present, there is no prefunding of the postretirement benefits 
recognized under FASB Statement No. 106.  The following table presents the 
status of the plans reconciled with amounts recognized in the consolidated 
balance sheet for the company's postretirement benefits:

                                                             June 30  
in millions                                              1997        1996 
--------------------------------------------------------------------------
Accumulated postretirement 
  benefit obligation:
    Retirees and dependents                            $ 97.2      $ 94.2
    Fully eligible active plan participants              11.5        10.9
    Other active plan participants                       36.9        35.5
                                                       -------     -------
                                                        145.6       140.6
Unrecognized prior period gain                            7.6         4.8
Unamortized plan amendment                               11.5        12.3
                                                       -------     -------
Postretirement benefit liability recognized                    
  in the consolidated balance sheet                    $164.7      $157.7
                                                       -------     -------
                                                       -------     -------

    For measurement purposes, the assumed weighted average annual rate of 
increase per capita cost of health care benefits was 8.5 percent for 1998 and 
assumed to decrease one percent per year to 5.5 percent in 2001 and remain 
constant thereafter.  As noted above, for U.S. employees retiring after 
December 31, 1992, the company's policy is to increase retiree contributions 
so that the company's annual per capita cost contribution remains constant at 
the level incurred in the year 2000.  The weighted average discount rate used 
in determining the accumulated postretirement benefit obligation was 7.4 
percent at June 30, 1997, and 7.8 percent at June 30, 1996.  The rate of 
increase on compensation levels assumed was 4.8 percent at June 30, 1997 and 
1996.

    A one percent increase in the annual health care cost trend rates would 
have increased the accumulated postretirement benefit obligation at June 30, 
1997, by approximately $8.6 million and increased postretirement benefit 
expense for fiscal 1997 by approximately $.8 million.

OTHER
The company contributes to savings plans for eligible domestic employees.  
The company contributions to the savings plans were $6.1 million in 1997, and 
$5.3 million in 1996 and 1995. 


34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


INCENTIVE PLAN

In connection with the Spinoff, 5,583,465 options to purchase shares of Old 
Morton's common stock held by current and former employees of Old Morton's 
specialty chemicals and salt businesses and corporate operations were 
exchanged for 7,225,524 options to purchase shares of the company's common 
stock.  The adjustment of the number of shares subject to the new options and 
the exercise price of such options was made pursuant to a formula designed to 
maintain the relationship between the exercise price of the new options and 
the market price of the underlying shares as well as the aggregate unrealized 
value of such options.

    Under Old Morton's 1989 Incentive Plan, grants may be made to key 
employees of stock options, stock appreciation rights, shares of restricted 
stock, other awards valued by reference to the company's common stock and 
cash.  Under the 1982 Key Employees Stock Option and Performance Unit Plan, 
grants could be made to key employees of stock options, stock options with 
alternative appreciation rights and appreciation rights not related to any 
option.  In addition, certain outstanding options provide for supplemental 
cash payments to  optionees upon exercise for the purpose of reimbursing them 
for the income tax liability incurred as the result of such exercises. All 
options granted have an option price equal to the fair value of the company's 
stock's at date of grant and the number of options is fixed.  Options expire 
ten years after date of grant.

    Under the terms of the 1989 Incentive Plan, restricted stock award shares 
have been granted to certain employees at no cost. The outstanding restricted 
stock award shares vest from one to five years subsequent to their award 
dates.  The cost of restricted stock awards, based on the stock's fair market 
value at the award dates, is charged to consolidated equity and subsequently 
amortized against earnings over the vesting period. At June 30, 1997, 15,000 
shares of the company's common stock were outstanding under restricted stock 
awards.

    At June 30, 1997 limited appreciation rights were outstanding covering 
3,402,458 option shares.  Limited appreciation rights are paid in cash in 
lieu of the related options upon a change in control of the company, at which 
time a charge to earnings would be recorded.  As of June 30, 1997, 
supplemental cash payment rights were outstanding with respect to 645,270 
option shares, payable upon exercise of options or limited appreciation 
rights. Supplemental cash payment rights outstanding have been accrued based 
on the current fair market value of the company's stock and current income 
tax rates.

    At June 30, 1997, 8,396,456 shares of the company's common stock were 
reserved for both outstanding and future grants of options and payment of 
appreciation rights and other stock-based awards.

    Due to the Spinoff, the number of option shares and the related exercise 
prices in the following summary have been adjusted to maintain both the total 
fair market value of common stock underlying the options, and the 
relationship between the market value of the company's common stock and the 
option's exercise price in all years presented.  Options previously granted 
to ASP employees are excluded from the summary.

                                                          Weighted average
                                      Shares                exercise price
--------------------------------------------------------------------------
Options outstanding
        at June 30, 1994             7,719,010                  $13.18
            Granted                  1,057,900                   22.66
            Cancellations              (33,043)                  22.55
            Exercised                 (984,606)                  10.38
                                    -----------
Options outstanding
        at June 30, 1995             7,759,261                   14.78
            Granted                  1,010,505                   24.40
            Cancellations              (78,974)                  24.23
            Exercised               (1,294,751)                  12.31
                                    -----------
Options outstanding       
        at June 30, 1996             7,396,041                   16.40
            Granted                    855,428                   29.10
            Cancellations              (39,327)                  28.99
            Exercised               (1,480,056)                  12.65
                                    -----------
Options outstanding
        at June 30, 1997             6,732,086                   18.70
                                    -----------

Options exercisable at:
        June 30, 1995                6,730,850                   13.58
        June 30, 1996                6,453,851                   15.23
        June 30, 1997                5,915,328                   17.27

    The range of exercise prices for options outstanding at June 30, 1997, 
was $7.93 to $32.84.  The range of exercise prices for options is wide due 
primarily to the increasing price of Old Morton's stock over the period of 
the grants.  

    The following table summarizes information about options outstanding at 
June 30, 1997:

                                                   Range of exercise prices
--------------------------------------------------------------------------------
                                              $7.93-$13.78         $21.63-$32.84
Outstanding options
   Number of shares                             3,222,507            3,509,579
   Weighted average
    remaining contractual life (in years)          3.65                 7.64
   Weighted average exercise price                $12.40               $24.49
 Exercisable options
   Number of shares                             3,222,507            2,692,821
   Weighted average exercise price                $12.40               $23.09


35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


    The company has elected to follow APB Opinion No. 25, "Accounting for 
Stock Issued to Employees," to account for its employee stock options 
because, as discussed below, the alternative fair value accounting provided 
for under Financial Accounting Standards Board Statement No. 123, "Accounting 
for Stock-Based Compensation," requires the use of option valuation models 
that were not developed for use in valuing employee stock options. Under APB 
No. 25, because the exercise price of the company's employee stock options 
equals the market price of the underlying stock on the date of grant, no 
compensation expense is recognized in the company's financial statements.

    Pro forma information regarding income from continuing operations and 
income per share is required by Statement No. 123.  This information is 
required to be determined as if the company had accounted for its employee 
stock options granted in fiscal years 1997 and 1996 under the fair value 
method.  The fair value of options granted in these years as reported below 
has been estimated at the date of grant using a Black-Scholes option pricing 
model with the following weighted average assumptions for 1997 and 1996:

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

Expected life (in years)                                        7
Risk-free interest rate                                      6.5%
Expected volatility                                           34%
Expected dividend yield                                        2%

    The Black-Scholes option valuation model was developed for use in 
estimating the fair value of traded options that have no vesting restrictions 
and are fully transferable.  In addition, option valuation models require the 
input of highly subjective assumptions, including the expected stock price 
volatility. Because the company's options have characteristics significantly 
different from those of traded options, and because changes in the subjective 
input assumptions can materially affect the fair value estimate, in 
management's opinion, the existing models do not necessarily provide a 
reliable single measure of the fair value of its employee stock options.  The 
weighted average estimated fair value of employee stock options granted 
during 1997 and 1996 was $14.86 and $12.34 per share.

    For purposes of pro forma disclosures, the estimated fair value of the 
options is amortized to expense over the options' vesting period.  The 
company's pro forma information from continuing operations follows (in 
millions, except per share information):

                                                  1997      1996
-----------------------------------------------------------------
Pro forma income                                $202.5    $172.3
Pro forma income per share                        1.41      1.15

    Pro forma net income from continuing operations was reduced by $3.4 
million ($.02 per share) in 1997 due to additional pro forma compensation 
resulting from adjustments to options made in connection with the Spinoff.

    The effects on pro forma disclosures of applying Statement No. 123 are 
not likely to be representative of the effects of such disclosures in future 
years.  Because Statement No. 123 is applicable only to options granted 
subsequent to June 30, 1995, the pro forma effect is not fully reflected in 
fiscal 1996.

ENVIRONMENTAL MATTERS

The company, like others in similar businesses, is subject to extensive 
federal, state and local environmental laws and regulations.  Although 
company environmental policies and practices are designed to ensure 
compliance with these laws and regulations, future developments and 
increasingly stringent regulation could require the company to make 
additional unforeseen environmental expenditures.

    Environmental accruals are routinely reviewed on an interim basis as 
events and developments warrant and are subjected to a comprehensive review 
annually during the fiscal fourth quarter.

    The company has been named a potentially responsible party at 
approximately 60 inactive waste disposal sites where cleanup costs have been 
or may be incurred under the Federal Comprehensive Environmental Response, 
Compensation and Liability Act and similar state statutes.  The company's 
potential exposure has been evaluated on a site-by-site basis, and an accrual 
reflecting the company's best estimate of the liability has been established 
to the extent sufficient information is available to reasonably estimate 
costs which may be incurred.  However, at certain of these sites, the company 
is unable, due to a variety of factors, to assess and quantify the ultimate 
extent of its responsibility for study and remediation costs.  The most 
significant of these sites is located in Wood-Ridge, New Jersey, where, at 
present, the company and one other party have been held jointly and severally 
liable for the cost of remediation necessary to correct mercury-related 
environmental problems associated with a former mercury processing plant.  
Although the company has accrued for expected site study costs and some 
remedial effort, no reliable estimate can presently be made of the company's 
range of liability due to the absence of site-specific data, the unique 
nature of mercury plant wastes and the complex characteristics of the plant 
site and adjacent areas.  An estimate of the range of liability at Wood-Ridge 
is not reasonably 


36
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


possible until technical studies are sufficiently completed to permit such a 
determination.  The Wood-Ridge plant site study commenced in early fiscal 
1997, and is estimated to take approximately 42 months to complete.  Study of 
the surrounding area is expected to begin after commencement of the plant 
site study on a timetable yet to be determined.  The company's ultimate 
exposure will also depend upon the continued participation of the other party 
held liable and on the results of both formal and informal attempts to spread 
liability to others believed to share responsibility.

    Where appropriate, the analysis to determine the company's liability, if 
any, with respect to remedial costs at the above sites reflects an assessment 
of the likelihood and extent of participation of other potentially 
responsible parties.  The possibility of recoveries from insurance carriers 
(in addition to recoveries previously made) is factored into accrual 
determinations only when such additional recoveries are probable of 
realization.

    During the second quarter of fiscal 1996, the company received 
approximately $24.1 million related to settlement of substantially all claims 
against former insurance carriers for cleanup expenses at chemical waste 
disposal sites located throughout the country.  These settlements involved 
policies written by various insurance companies from the 1940s through the 
mid 1980s.   Due to the age of these issues, related expenses had previously 
been charged to earnings either through actual expenditures for remediation 
or through the establishment of environmental accruals.  As such, the 
settlement payments received were included in sundry income.

    During the fourth quarter of fiscal 1996, the U.S. EPA notified the 
company of possible irregularities in water discharge monitoring reports 
filed by the Moss Point, Mississippi, plant in early 1995. The company 
retained an outside law firm to investigate, and it was confirmed that such 
reports had been falsified over a period of years.  Other environmental 
problems at the plant were also identified, and the investigation has been 
expanded to address the additional issues.  During the first quarter of 
fiscal 1997, two federal grand jury subpoenas were served on the company 
seeking documents related to waste water discharges at this plant.  The 
company has furnished the requested documents.  As a result of these 
irregularities and possible violations, the company may be exposed to fines, 
penalties and remedial expenses.  Since the matter is still being 
investigated, the company is unable to determine its ultimate resolution.  
The company is cooperating with the environmental authorities and is keeping 
them informed on a continuing basis.

    The company's cleanup expenditures totaled approximately $3.1 million, 
$6.8 million and $3.0 million for 1997, 1996 and 1995. Amounts accrued as of 
June 30, 1997, are generally expected to be paid out over a period of up to 
15 years.

    Although the level of future expenditures for environmental matters 
cannot be determined with any degree of certainty, based on the facts 
presently known to management, it does not believe that such costs will have 
a material effect on the company's financial position, results of operations, 
or liquidity.

LITIGATION AND REGULATION

There are judicial and administrative claims pending or contemplated against 
the company in addition to those of an environmental nature discussed in the 
Environmental Matters noted above.  Management believes that the resolution 
of those claims should not have a material effect upon the company's 
financial position, results of operations, or liquidity.

    Various governmental agencies have authority to limit or prohibit 
distribution of some of the company's products should they formally conclude 
that continued distribution is unsafe to the population or the environment.  
There are currently no challenges pending, the resolution of which would have 
a material effect upon the company's operations.

LEASE COMMITMENTS

The company has commitments under operating leases primarily for building and 
office space, railroad equipment and real estate. Rental expense charged in 
1997, 1996 and 1995 was $35.2 million, $36.1 million and $34.0 million, 
including insignificant amounts for contingent rentals and sublease income.  
Renewal and purchase options are available on certain of these leases.

    Future minimum rental commitments under operating leases having initial 
or remaining non-cancelable terms in excess of one year as of June 30, 1997, 
were as follows (in millions):   1998 -$23.4; 1999 - $15.6; 2000 - $13.6; 
2001 - $11.0; 2002 - $8.6; thereafter - $301.3.

NEW ACCOUNTING PRONOUNCEMENT

In February 1997, the Financial Accounting Standards Board issued Statement 
of Financial Accounting Standards No. 128, "Earnings Per Share".  Statement 
No. 128 specifies the computation, presentation, and disclosure requirements 
for earnings per share and is effective for financial statements issued for 
years ending after December 15, 1997, including interim periods.  The company 
will adopt Statement No. 128 for the year ended June 30, 1998.  The 
difference between basic and diluted earnings per share, as defined by 
Statement No. 128, would not be material for fiscal years 1997, 1996 and 1995.


37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


BUSINESS SEGMENT INFORMATION

<TABLE>
<CAPTION>
OPERATIONS IN DIFFERENT BUSINESSES                                                                        Profit as a percent
                                                                                                              of average
SALES AND PROFIT                         Sales(1)                             Profit(2)                   identifiable assets
                            --------------------------------      --------------------------------      -----------------------
in millions                   1997        1996        1995          1997        1996        1995        1997     1996     1995
-------------------------------------------------------------------------------------------------------------------------------
<S>                         <C>         <C>         <C>           <C>         <C>         <C>           <C>      <C>      <C>
Specialty Chemicals(3)      $1,680.9    $1,611.7    $1,564.7      $  268.6    $  222.0    $  223.5      18.1%    15.4%    15.8%
Salt                           659.7       603.3       534.9         137.5       124.7       117.4      23.2     32.9     34.0
                            ---------   ---------   --------      ---------   ---------   --------
Business totals              2,340.6     2,215.0     2,099.6         406.1       346.7       340.9      19.5     19.0     19.4
General Corporate                                                                                                            
  expense--net(4)                 --          --          --         (72.3)      (61.4)      (97.3)
                            ---------   ---------   --------      ---------   ---------   --------
Consolidated totals         $2,340.6    $2,215.0    $2,099.6      $  333.8    $  285.3    $  243.6
                            ---------   ---------   --------      ---------   ---------   --------
                            ---------   ---------   --------      ---------   ---------   --------
</TABLE>

<TABLE>
<CAPTION>
ASSETS, CAPITAL EXPENDITURES,
  DEPRECIATION AND AMORTIZATION
  
                                        Year end                               Capital                      Depreciation and    
                                   identifiable assets                      expenditures                      amortization      
                            --------------------------------      --------------------------------      ------------------------
in millions                   1997        1996        1995          1997        1996        1995         1997     1996     1995 
--------------------------------------------------------------------------------------------------------------------------------
<S>                         <C>         <C>         <C>           <C>         <C>         <C>           <C>      <C>      <C>
Specialty Chemicals         $1,540.0    $1,427.8    $1,459.2      $   75.2    $   86.8    $   83.0      $ 71.9   $ 66.8   $ 63.1
Salt(5)                        802.2       385.3       371.9          40.7        35.8        42.1        40.2     32.6     30.8
                            ---------   ---------   --------      ---------   ---------   --------      ------   ------   ------
Business totals              2,342.2     1,813.1     1,831.1         115.9       122.6       125.1       112.1     99.4     93.9
General Corporate(6)           462.7       180.9       199.2           1.5         1.8         1.3         3.9      3.5      3.5
Net assets of 
  discontinued business           --       635.1       621.7            --          --          --          --       --       --
                            ---------   ---------   --------      ---------   ---------   --------      ------   ------   ------
Consolidated totals         $2,804.9    $2,629.1    $2,652.0      $  117.4    $  124.4    $  126.4      $116.0   $102.9   $ 97.4
                            ---------   ---------   --------      ---------   ---------   --------      ------   ------   ------
                            ---------   ---------   --------      ---------   ---------   --------      ------   ------   ------
</TABLE>
<TABLE>
<CAPTION>
OPERATIONS IN DIFFERENT GEOGRAPHIC AREAS                                                                    Year end         
                                      Sales(1)                              Profit(2)                 identifiable assets    
                           ------------------------------      -----------------------------      ----------------------------
in millions                  1997       1996       1995         1997       1996       1995        1997       1996       1995 
------------------------------------------------------------------------------------------------------------------------------
<S>                        <C>        <C>        <C>          <C>        <C>        <C>         <C>        <C>        <C>
United States              $1,519.1   $1,491.9   $1,424.9     $  283.7   $  237.4   $  235.2    $1,260.2   $1,240.9   $1,260.1
Foreign Areas--                                                                                       
     Canada and Bahamas       218.0      194.1      185.3         50.5       41.0       35.1       196.1      161.5      153.4
     Europe                   572.8      498.0      459.5         68.9       64.7       67.2       849.0      388.1      392.3
     Others                    30.7       31.0       29.9          3.0        3.6        3.4        36.9       22.6       25.3
                           ---------  ---------  --------     ---------  ---------  ---------   ---------  ---------  ---------
                           $2,340.6   $2,215.0   $2,099.6     $  406.1   $  346.7   $  340.9    $2,342.2   $1,813.1   $1,831.1
                           ---------  ---------  --------     ---------  ---------  ---------   ---------  ---------  ---------
                           ---------  ---------  --------     ---------  ---------  ---------   ---------  ---------  ---------
</TABLE>

(1)  Export sales from the United States in fiscal 1997, 1996 and 1995 were 
     7% of sales to unaffiliated customers in each year, primarily to Canada, 
     Europe and Japan.  Intersegment and intergeographic area sales and 
     transfers were insignificant.  No country within the European grouping 
     contributed or represented 10% or more of sales, profit, or identifiable 
     assets (except $381.7 million of identifiable assets in France in 1997).

(2)  Business segment profit is from continuing operations and is before 
     income taxes, interest income, interest expense and allocation of 
     certain corporate administrative expenses, but included foreign exchange 
     losses of $(2.7) million, $(.7) million and $(1.8) million in 1997, 1996 
     and 1995.

(3)  Fiscal 1996 profit included special charges of $27.1 million. Refer to 
     Special Charges footnote.  Fiscal 1996 profit also included $11.2 
     million related to proceeds received, net of the impact on operations, 
     for the formation of a joint venture.

(4)  Fiscal 1996 included $24.1 million income related to the settlement of 
     several environmental insurance issues.  Fiscal 1996 also included 
     special charges of $2.1 million.  Refer to Special Charges footnote.

(5)  Fiscal 1997 year end identifiable assets include the acquisition of 
     Salins du Midi.

(6)  Corporate assets are principally cash and cash equivalents, deferred 
     income tax benefits, prepaid expenses and property, plant and equipment.


38
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS


To the Shareholders and Board of Directors
Morton International, Inc. 

We have audited the accompanying consolidated balance sheets of Morton 
International, Inc. as of June 30, 1997 and 1996, and the related 
consolidated statements of income and cash flows for each of the three years 
in the period ended June 30, 1997. These financial statements are the 
responsibility of the company's management.  Our responsibility is to express 
an opinion on these financial statements based on our audits.

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

    In our opinion, the financial statements referred to above present 
fairly, in all material respects, the consolidated financial position of 
Morton International, Inc. at June 30, 1997 and 1996, and the consolidated 
results of its operations and its cash flows for each of the three years in 
the period ended June 30, 1997, in conformity with generally accepted 
accounting principles.  

    As discussed in the notes to the consolidated financial statements, the 
company adopted Financial Accounting Standards Board Statement No. 121, 
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets 
to be Disposed Of" in 1996.


/s/ ERNST & YOUNG LLP


Chicago, Illinois
July 29, 1997



REPORT OF MANAGEMENT

We have prepared the accompanying consolidated financial statements of Morton 
International, Inc. in conformity with generally accepted accounting 
principles appropriate in the circumstances. The integrity and objectivity of 
data in these financial statements are the responsibility of management. 
Based on currently available information, management makes informed judgments 
and estimates of the effects of certain events and transactions when 
preparing the financial statements. Financial information included elsewhere 
in this Annual Report is consistent with that contained in the financial 
statements.

    We maintain a highly developed accounting system and controls to provide 
reasonable assurance that assets are safeguarded against loss from 
unauthorized use or disposition and that financial records are reliable for 
preparing financial statements and maintaining accountability for assets.  
However, there are inherent limitations that should be recognized in 
considering the potential effectiveness of any system of internal accounting 
control.  The concept of reasonable assurance is based on the recognition 
that the cost of a system of internal control should not exceed the benefits 
derived and that the evaluation of those factors requires estimates and 
judgments by management.  The company's systems provide such reasonable 
assurance.

    The functioning of the accounting system and controls over it are 
reviewed by an extensive program of internal audits and by the company's 
independent auditors, Ernst & Young LLP.  The responsibility of the Board of 
Directors for the company's financial statements is exercised through its 
Audit Committee which is composed of Directors who are not company employees. 
The Audit Committee recommends to the Board of Directors the selection of the 
independent auditors and reviews their fee arrangements.  It meets 
periodically with management, the internal auditors and the independent 
auditors to assure that each is carrying out its responsibilities.  The 
independent auditors have full and free access to the Audit Committee to 
discuss auditing and financial reporting matters.

    The company's legal counsel has reviewed the company's position with 
respect to litigation, claims, assessments, and illegal or questionable acts, 
has communicated that position to our independent auditors, and is satisfied 
that it is properly disclosed in the financial statements.

    The company has prepared and distributed to its employees a statement of 
its policies prohibiting certain activities deemed illegal, unethical, or 
against the best interest of the company. Certification of compliance with 
such policies is required and any apparent problems are reviewed by a 
committee of the Board of Directors.  In consultation with our independent 
auditors, we have developed and instituted additional internal controls and 
internal audit procedures designed to prevent or detect violations of those 
policies.  We believe that the policies and procedures provide reasonable 
assurance that our operations are conducted in conformity with the law and 
with a high standard of business conduct.


/s/ Thomas F. McDevitt

Thomas F. McDevitt
Vice President Finance and Chief Financial Officer
July 29, 1997


39