SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                 SECURITIES EXCHANGE ACT OF 1934 (Fee Required)

                   For the fiscal year ended December 31, 1998

                                       OR

            [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
             For the transition period from .......... to ..........

                         Commission file number: 0-22624

                            FOAMEX INTERNATIONAL INC.
             (Exact Name of registrant as Specified in its Charter)

         Delaware                                      05-0473908         
(State or other jurisdiction of                     (I.R.S. Employer
incorporation or organization)                      Identification Number)

1000 Columbia Avenue, Linwood, PA                       19061      
(Address of principal executive offices)            (Zip Code)

Registrant's telephone number, including area code:  (610) 859-3000

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:
          Common Stock,  par value $.01 per share,  which is traded  through the
          National  Association  of Securities  Dealers,  Inc.  National  Market
          System.

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during the  preceding  12 months  (or for such  shorter  periods  that the
registrant  was required to file such  reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X NO

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

     The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of April 22, 1999 was $66,696,472.

     The number of shares  outstanding  of the  registrant's  common stock as of
April 22, 1999 was 25,052,991.

                       DOCUMENTS INCORPORATED BY REFERENCE

   Portions of the Company's definitive proxy statement to be filed within 120
days pursuant to Reg. 12b-23 of the Securities Exchange Act of 1934, as amended.
<PAGE>

                            FOAMEX INTERNATIONAL INC.

                                      INDEX

                                                                            Page
Part I
         Item  1.  Business                                                  3
         Item  2.  Properties                                                9
         Item  3.  Legal Proceedings                                        10
         Item  4.  Submission of Matters to a Vote
                        of Security Holders                                 13

Part II
         Item  5.  Market for Registrant's Common Equity and
                        Related Stockholder Matters                         14
         Item  6.  Selected Consolidated Financial Data                     15
         Item  7.  Management's Discussion and Analysis of
                        Financial Condition and Results of Operations       17
         Item  8.  Financial Statements and Supplementary Data              28
         Item  9.  Changes in and Disagreements with Accountants
                        on Accounting and Financial Disclosure              28

Part III
         Item 10.  Directors and Executive Officers of the Registrant       28
         Item 11.  Executive Compensation                                   28
         Item 12.  Security Ownership of Certain Beneficial Owners
                        and Management                                      28
         Item 13.  Certain Relationships and Related Transactions           28

Part IV
         Item 14.  Exhibits, Financial Statement Schedules
                        and Reports on Form 8-K                             29

         Signatures                                                         36




The  Registrant  will  furnish a copy of any  exhibit to this Form 10-K upon the
payment of a fee equal to the Registrant's reasonable expense in furnishing such
exhibit.

                                       2
<PAGE>
PART I
ITEM l.  BUSINESS

General

       Foamex  International  Inc. (the "Company") is a holding company which is
engaged  primarily in the business of manufacturing  and  distributing  flexible
polyurethane  and advanced  polymer foam products.  As of December 31, 1998, the
Company's operations are conducted through its wholly owned subsidiaries, Foamex
L.P.  and Foamex  Carpet  Cushion,  Inc.  ("Foamex  Carpet")  and consist of the
following operating segments:  (i) foam products,  (ii) carpet cushion products,
(iii)  automotive  products,  (iv)  technical  products  and  (v)  other,  which
primarily  consists of certain  foreign  manufacturing  operations in Mexico and
Asia,  corporate  expenses  not  allocated to the other  operating  segments and
restructuring and other charges. The net sales and income (loss) from operations
of these  operating  segments  for each of the last three years are  included in
Note 16 to the consolidated  financial statements.  The Company was incorporated
in 1993 to act as a holding company for Foamex L.P.

       On March 16,  1999,  the  Company  announced  that it had  hired  John G.
Johnson,  Jr. as President,  Chief Executive Officer and director of the Company
following the resignation of Andrea Farace from the positions of Chairman of the
Board,  Chief  Executive  Officer and director of the Company.  The Company also
announced that it had hired JP Morgan  Securities Inc. as a financial advisor to
explore strategic alternatives to maximize shareholder value.

       On March 16,  1998,  the Company  announced  that its Board of  Directors
received an unsolicited buyout proposal from Trace International  Holdings, Inc.
("Trace"), the Company's principal stockholder. Trace proposed to acquire all of
the  outstanding  common  stock  of the  Company  not  owned  by  Trace  and its
subsidiaries  (the "Public  Shares") for a cash price of $17.00 per share. As of
March 16, 1998,  Trace and its  subsidiaries  beneficially  owned  approximately
11,475,000  shares or approximately  46% of the outstanding  common stock of the
Company.  In  response  to  Trace's  offer,  the  Company's  Board of  Directors
appointed a special  committee to determine the advisability and fairness of the
proposed  buyout  to  the  Company's  stockholders  other  than  Trace  and  its
subsidiaries.

       On June  25,  1998,  Trace,  Trace  Merger  Sub,  Inc.,  a  wholly  owned
subsidiary of Trace ("Merger  Sub"),  and the Company  entered into an Agreement
and Plan of Merger (the "First Merger Agreement").  Pursuant to the terms of the
First  Merger  Agreement,  Merger Sub would have been  merged  with and into the
Company (the "First Merger") and each outstanding  share of common stock,  other
than  common  stock held by Trace and its  subsidiaries,  treasury  shares,  and
common stock with respect to which  appraisal  rights would have been perfected,
would have been converted into the right to receive $18.75 per share in cash. On
November 5, 1998, Trace terminated the First Merger  Agreement,  pursuant to its
terms, due to the failure of certain financing conditions.

       On November 5, 1998,  Trace,  Merger Sub and the Company  entered  into a
second Agreement and Plan of Merger (the "Second Merger Agreement"). Pursuant to
the terms of the Second Merger Agreement, Merger Sub would have been merged with
and into the Company (the "Second Merger") and each outstanding  share of common
stock,  other than  common  stock held by Trace and its  subsidiaries,  treasury
shares,  and common stock with respect to which appraisal rights would have been
perfected,  would have been converted into the right to receive $12.00 per share
in cash.  Trace  delivered a letter to the Company,  dated  January 8, 1999 (the
"Notice of Termination"),  terminating the Second Merger Agreement,  pursuant to
its terms, due to the failure of certain financing conditions.

       In  connection  with the First  Merger  Agreement  and the Second  Merger
Agreement,  the  Company  retained  and paid for legal  counsel  to the  Special
Committee,  a financial advisor to the Special  Committee,  legal counsel to the
Board of  Directors  and a  financial  advisor  to the  Board of  Directors.  In
addition, the Company commenced,  but did not close, a debt tender offer, a debt
exchange offer, an internal  corporate  restructuring  and refinancing,  and the
offer of three different issues of high-yield notes.

       On February 27, 1998, the Company and certain of its affiliates completed
a series of  transactions  designed to simplify the  Company's  structure and to
provide future operational  flexibility  (collectively,  the "GFI Transaction").
Prior to the consummation of these  transactions,  Foamex L.P. defeased the $4.5
million  outstanding  principal  amount of its 9 1/2% senior  secured  notes due
2000. Foamex L.P. settled its intercompany  payables to General Felt 

                                       3

<PAGE>

Industries,  Inc.  ("General  Felt") with $4.8  million in cash and a promissory
note in the aggregate  principal  amount of $34.0  million  supported by a $34.5
million letter of credit under the Foamex L.P. credit facility (the  "Foamex/GFI
Note").  The initial  transaction  resulted in the transfer  from Foamex L.P. to
Foam Funding LLC, an indirect  wholly owned  subsidiary of Trace,  of all of the
outstanding  common stock of General Felt, in exchange for (i) the assumption by
Foam Funding LLC of $129.0  million of Foamex L.P.'s  indebtedness  and (ii) the
transfer  by Foam  Funding  LLC to  Foamex  L.P.  of a 1%  non-managing  general
partnership  interest in Foamex L.P. As a result,  General  Felt ceased  being a
subsidiary  of Foamex L.P. and was relieved  from all  obligations  under Foamex
L.P.'s 9 7/8% senior subordinated notes due 2007 and 13 1/2% senior subordinated
notes due 2005. Upon consummation of the initial  transaction,  Foamex Carpet, a
newly formed wholly owned subsidiary of the Company,  the Company,  Foam Funding
LLC, and General Felt entered into an Asset  Purchase  Agreement  dated February
27, 1998, in which General Felt sold substantially all of its assets (other than
cash, the Foamex/GFI Note and its operating facility in Pico Rivera, California)
to Foamex Carpet in exchange for (i) $20.0 million in cash and (ii) a promissory
note  issued by Foamex  Carpet to Foam  Funding LLC in the  aggregate  principal
amount of $70.2  million.  The $20.0  million  cash  payment  was funded  with a
distribution by Foamex L.P. Upon  consummation of the transactions  contemplated
by the Asset Purchase  Agreement,  Foamex Carpet entered into a credit agreement
with the  institutions  from time to time party  thereto as issuing  banks,  and
Citicorp USA, Inc. and The Bank of Nova Scotia, as administrative  agents, which
provides for up to $20.0 million in revolving credit  borrowings.  Foamex Carpet
conducts the carpet cushion business previously conducted by General Felt. Also,
Foam  Funding  LLC  retained  ownership  of  one  of  General  Felt's  operating
facilities,  which is being  leased to  Foamex  Carpet,  and the  $34.0  million
Foamex/GFI Note.

       The Private  Securities  Litigation  Reform Act of 1995  provides a "safe
harbor"  for  forward-looking   statements  so  long  as  those  statements  are
identified as  forward-looking  and are  accompanied  by  meaningful  cautionary
statements  identifying  important  factors that could cause  actual  results to
differ  materially from those projected in such  statements.  In connection with
certain forward-looking  statements contained in this Annual Report on Form 10-K
and those  that may be made in the future by or on behalf of the  Company  which
are  identified  as  forward-looking,  the Company  notes that there are various
factors  that could cause  actual  results to differ  materially  from those set
forth in any such forward-looking statements, such as the ability of the Company
to  negotiate  amendments  of its debt  agreements,  the  Company's  ability  to
continue  operations as a viable going concern,  raw material  price  increases,
general economic conditions, the level of automotive production,  carpet cushion
production     and    housing     starts,     the    completion    of    various
restructuring/consolidation  plans,  the Company's  capital and debt  structure,
litigation  and  changes  in   environmental   legislation   and   environmental
conditions.  The forward-looking  statements  contained in this Annual Report on
Form 10-K were  prepared by  management  and are  qualified  by, and subject to,
significant business, economic, competitive,  regulatory and other uncertainties
and contingencies,  all of which are difficult or impossible to predict and many
of which are beyond the  control of the  Company.  Accordingly,  there can be no
assurance that the forward-looking statements contained in this Annual Report on
Form 10-K will be  realized  or that actual  results  will not be  significantly
higher  or lower.  The  forward-looking  statements  have not been  audited  by,
examined by,  compiled by or subjected to agreed-upon  procedures by independent
accountants,  and no  third-party  has  independently  verified or reviewed such
statements.  Readers of this Annual  Report on Form 10-K should  consider  these
facts in evaluating the information contained herein. In addition,  the business
and  operations of the Company are subject to  substantial  risks which increase
the uncertainty  inherent in the  forward-looking  statements  contained in this
Annual  Report on Form 10-K.  The  inclusion of the  forward-looking  statements
contained  in this  Annual  Report  on Form 10-K  should  not be  regarded  as a
representation   by  the   Company  or  any  other   person   that  any  of  the
forward-looking  statements contained in this Annual Report on Form 10-K will be
achieved. In light of the foregoing,  readers of this Annual Report on Form 10-K
are  cautioned  not to place undue  reliance on the  forward-looking  statements
contained herein.

       The  principal  executive  offices  of the  Company  are  located at 1000
Columbia Avenue,  Linwood,  Pennsylvania 19061 and its telephone number is (610)
859-3000.

       References  in this  Annual  Report  on Form 10-K to the  "Company"  mean
Foamex International Inc. and, where relevant or applicable, its subsidiaries.

                                       4
<PAGE>
Flexible Polyurethane Foam and Advanced Polymer Foam Products

       The  Company is one of the  largest  manufacturers  and  distributors  of
flexible  polyurethane and advanced polymer foam products in North America.  The
Company's  operating  segments  include:  (i) foam  products,  consisting of (a)
cushioning foams for bedding, furniture,  packaging and health care applications
and (b) foam-based consumer products such as futons, pillows,  mattress pads and
juvenile furniture,  (ii) carpet cushion products,  consisting of carpet padding
and related products, (iii) automotive products,  consisting of automotive trim,
laminates and other products, (iv) technical products, consisting of reticulated
and other  specialty  foams used for  reservoiring,  filtration,  gasketing  and
sealing  applications and (v) other, which primarily consists of certain foreign
manufacturing operations in Mexico and Asia, corporate expenses not allocated to
the other operating segments and restructuring and other charges. See Note 16 to
the  consolidated  financial  statements  for further  discussion  of  operating
segments.

       The  Company  has a  diverse  customer  base  in  each  of its  principal
operating  segments.  Foam products  such as cushioning  foams are sold to major
bedding and furniture  manufacturers  such as Sealy,  Simmons and  Berkline.  In
addition,  foam-based consumer products such as futons,  pillows,  mattress pads
and  juvenile  furniture  are sold to retailers  such as Wal-Mart,  Kmart and JC
Penney. Carpet cushion products such as carpet underlay are sold to distributors
and major floor  covering  retailers  such as Sears,  CarpetMax  and Home Depot.
Automotive  products such as automotive  foam products and laminates are sold to
original equipment  manufacturers  ("OEMs"),  including Ford, General Motors and
DaimlerChrysler,  and major  tier one  suppliers  such as Lear  Corporation  and
Johnson Controls. Technical products such as specialty and technical foams which
consist of reticulated foams and other customized  polyester and polyether foams
used for filtration and  reservoiring in a wide variety of applications are sold
by companies such as Hewlett-Packard and Briggs & Stratton.

       Foam Products

       The Company  distributes  foam  products  both  directly  and  indirectly
through independent fabrication operations.  These foams are used by the bedding
industry  in  quilts,  toppers,  cores  and  border  rolls for  mattresses,  the
furniture  industry  for seating  products  and the retail  industry for a broad
range of products  such as leisure  furniture,  futons,  bean bag chairs,  floor
pillows and pet beds. The foam products are generally sold in large volumes on a
regional basis because of high shipping costs.

       The Company's bedding products are sold to mattress manufacturers such as
Sealy,  Simmons,  Serta,  and Spring Air, both directly and indirectly,  through
independent fabrication  operations.  The Company also supplies cut-to-size seat
cushions, back cushions and other pieces to the furniture industry, including to
Berkline, Action, and Schnadig. The consumer products group, acquired as part of
the  acquisition  of  Crain  Industries,  Inc.  ("Crain")  in 1997  (the  "Crain
Acquisition"),  sells  therapeutic  sleep products such as mattress pads and bed
pillows  for the  health  care and  consumer  markets  and a broad  line of home
furnishing products to retailers throughout the United States.

       The development and introduction of value added products  continues to be
a priority  of the Company  including  viscoelastic  or  "memory"  foams for the
bedding  industry,  which maintain their resiliency  better than other foams and
materials and products incorporating Reflex(R).  Reflex(R), one of the Company's
most recent  product  introductions  was created using the VPF(R)  manufacturing
process. Reflex(R) materials, which include cushion wraps and cushion cores, are
advanced polymer  cushioning  products designed to improve comfort,  quality and
durability in upholstered  furniture and bedding products.  The Company has also
introduced high  efficiency  thermal  management foam products for  applications
such as work gloves and outerwear.

       Carpet Cushion Products

       The Company  manufactures  and distributes  carpet cushion products which
include  prime,  bonded,  sponge  rubber and felt carpet  cushion.  Prime carpet
cushion is made from  polyurethane  foam buns,  whereas bonded carpet cushion is
made from  various  types of scrap foam which are  shredded  into small  pieces,
processed  and then bonded  using a chemical  adhesive.  In February  1997,  the
Company introduced  Plushlife(TM),  a proprietary bonded carpet cushion product,
which combines two cushions into a single structure to absorb the energy of foot
traffic and enhance comfort.  The Company's carpet cushion products are marketed
through floor covering retailers such as Sears, Carpet Max and Home Depot.

                                       5

<PAGE>

       Automotive Products

       The Company is one of the largest  suppliers of automotive  foam products
for  the  North  American  operations  of  OEMs.  Depending  on  the  automotive
manufacturer  and/or the  application,  automotive foam products are supplied by
the  Company  either  directly  to  the  manufacturers  or  indirectly   through
sub-suppliers.  Automotive  products  are used for trim pads,  door panel parts,
headliners,  acoustical  purposes,  flame and adhesive  laminates  and rolls for
tri-lamination.  Tri-laminated  foam is applied to automotive  fabrics to form a
foam/fabric  composite that results in cost savings and aesthetic  value for the
automotive manufacturer.

       Domestic automotive  manufacturers have narrowed their supply base during
recent years,  and increased the percentage and dollar amount of components that
they purchase from outside suppliers. As a result, a smaller number of companies
are  supplying an  increasing  percentage  of  automotive  foam  products  since
automotive  suppliers are increasingly  offering  integrated systems which lower
the overall cost and improve quality  relative to previous  sourcing  methods in
which individually sourced components were assembled and installed by the OEMs.

       The  Company's  new  product   development  and  flexible   manufacturing
capabilities  allow it to produce  quality  automotive  foam products to satisfy
such  changing  specifications.  Examples of the  Company's  ability to react to
changing  industry   requirements  include  its  development  of  thermoformable
headliners,  tri-laminates,  advanced  cutting  technology and energy  absorbing
foams.  For  example,  the Company is one of the first  suppliers to introduce a
thermoformable  headliner,  Customfit(R),  made from rigid polyurethane foam. In
addition, the Company recently introduced Isoguard(TM), which is a rubber gasket
material for the automotive and household appliance industries. Also, the use of
tri-laminates has increased due manufacturers' need for significant cost savings
and consumer demand for improved aesthetics. The Company intends to increase its
production and distribution of foam and fabric components, such as tri-laminated
material for automotive seating.

       Automotive   manufacturers  are  increasingly  requiring  the  production
facilities  of their  suppliers  to meet certain  high  quality  standards.  The
Company has achieved and expects to maintain the highest quality ratings awarded
to foam  suppliers by automotive  manufacturers.  In addition,  all tier one and
tier two automotive supplier facilities worldwide will eventually be required to
meet the  QS-9000  quality  manufacturing  standards  set by the  United  States
automotive  manufacturers.  In 1996, the Company  completed QS-9000 and ISO-9001
certification  for its eight  domestic  facilities  which supply the  automotive
industry.  The Company  was one of the first  polyurethane  manufacturers  to be
QS-9000  certified  which  demonstrates  its commitment to producing the highest
quality products and meeting the needs of its customers.

       Technical Products

       The  Company  believes  that  it is  one  of the  foam  industry's  prime
innovators  and producers of  industrial,  specialty,  consumer and safety foams
(collectively,  "Technical Products"). Technical Products consist of reticulated
foams and other  custom  polyester  and  polyether  foams,  which are  sometimes
combined with other materials to yield specific properties.  Reticulation is the
thermal  or   chemical   process   used  to  remove  the   membranes   from  the
interconnecting  cells within  foam.  This leaves a porous,  skeletal  structure
allowing for the free flow of gases and/or liquids.  Felting and lamination with
other foams or materials give these composites specific properties.

       Reticulated  foams are well suited for  filtration,  reservoiring,  sound
absorption and sound transmission.  Industrial applications include carburetors,
computer  cabinets,  ink pad reservoirs,  high speed inkjet printers and speaker
grills.  Medical applications  include oxygenators for cardiopulmonary  surgery,
instrument  holders  for  sterilization,   pre-op  scrubbers   impregnated  with
anti-microbial  agents and EKG pads containing  conductive gels. Other Technical
Products  have  unique  characteristics  such  as  flame  retardancy  and  fluid
absorption.  Additional  products  sold  within  this  group  include  foams for
refrigerated supermarket produce counters, mop heads, paint brushes, diapers and
cosmetic applications.

                                       6

<PAGE>

       The Company uses advertising in trade journals and related media in order
to attract  customers  and,  more  generally,  to increase an  awareness  of its
capabilities for Technical Products. In addition,  due to the highly specialized
nature of most  Technical  Products,  the  Company's  research  staff works with
customers to design, develop and manufacture each product to specification.  The
Company's  Technical  Products  customers include  Hewlett-Packard  and Briggs &
Stratton.

       Other

       Other consists primarily of certain foreign  manufacturing  operations in
Mexico  and Asia,  corporate  expenses  not  allocated  to the  other  operating
segments and  restructuring  and other charges.  See Note 16 to the consolidated
financial statements.

       Marketing and Sales

       As of December 31, 1998,  the Company has a marketing  and sales force of
approximately  185 employees.  The Company's  executive vice  presidents  direct
sales efforts for each operating segment.

       Foam  products  are sold  directly  by the  Company to major  bedding and
furniture  manufacturers  such as Sealy,  Simmons and  Berkline and also through
third party  independent  fabricators.  In  addition,  the  Company  distributes
foam-based consumer products such as futons, pillows, mattress pads and juvenile
furniture to  retailers  such as Wal-Mart,  Kmart and JC Penney.  The  Company's
foam-based  consumer products sales efforts are primarily  regionally based with
salespersons  selling to local accounts.  The key strategic elements  supporting
growth in these areas are a focus on marketing and sales efforts,  high quality,
cost-competitive  products and low freight costs through optimal plant location.
Plant  locations are critical in this  regionalized  line of business  where the
transportation cost typically comprises a significant portion of product cost.

       Carpet cushion products are sold to distributors and major floor covering
retailers such as Sears, CarpetMax and Home Depot.

       The Company has been a leading  supplier of automotive  products to OEMs,
including Ford, General Motors and  DaimlerChrysler  for more than 30 years. The
Company is also the primary supplier of automotive  products to certain tier one
suppliers, including Lear Corporation and Johnson Controls. The Company competes
for new business both at the beginning of development of new models and upon the
redesign of existing models.  Once a foam producer has been designated to supply
parts for a new program,  the foam producer  usually produces parts for the life
of the program.  Competitive  factors in the market include  product quality and
reliability,  cost and  timely  service,  technical  expertise  and  development
capability, new product innovation and customer service.

       The Company's Technical Products are used for filtration and reservoiring
in a wide variety of  applications  by  companies  such as  Hewlett-Packard  and
Briggs & Stratton.  The Company markets most of its Technical Products through a
network of independent  fabrication and distribution companies in North America,
the United  Kingdom and South Korea.  Such  fabricators  or  distributors  often
further process Technical  Products or finish such products to meet the specific
needs of end users.  The Company's  specialty and technical foams service unique
end user  requirements  and are generally sold at relatively high margins.  This
line  of  business  is  characterized  by a  diversity  and  complexity  of both
customers and applications.

       International Operations and Export Sales

       The Company's net sales for its foreign  based  operations,  primarily in
Canada and Mexico,  for 1998,  1997,  and 1996 were $122.4  million (9.8% of net
sales),  $85.0  million  (9.1% of net  sales),  and $76.0  million  (8.2% of net
sales),  respectively.  The Company's  remaining  net sales are  primarily  from
customers located in the United States.

       Customers

       During the past three  years,  no one  customer  accounted  for more than
10.0% of the Company's net sales.  Customers  that represent more than 10% of an
operating  segment's net sales are Sealy in foam  products and Lear  Corporation
and  Johnson  Controls  in  automotive  products.  The  loss of any one of these
customers would have a 

                                       7

<PAGE>

material adverse effect on the Company. During the year ended December 31, 1998,
net sales to the five largest customers comprised  approximately  $272.0 million
or 21.8% of the Company's net sales.

       Manufacturing and Raw Materials

       As  of  December  31,  1998,  the  Company  conducted  operations  at  72
manufacturing  and  distribution  facilities with a total of  approximately  8.9
million square feet of floor space. The Company believes that its  manufacturing
and distribution  facilities are well suited for their intended purposes and are
in  good  condition.   The   manufacturing   and  distribution   facilities  are
strategically  located to service the Company's major customers because the high
freight  cost in relation to the cost of the foam product  generally  results in
distribution being most cost effective within a 200 to 300 mile radius.

       The Company's fabrication process involves cutting foam buns into various
shapes and sizes to meet customer  specifications.  Fabrication  foam is sold to
customers  and is utilized by the  Company to produce  its  foam-based  consumer
products.  Scrap foam,  generated in  connection  with the  fabrication  of foam
products, is used by the Company to produce rebond carpet cushion.

       Raw  materials  account for a  significant  portion of the  manufacturing
costs of the Company  and,  historically,  the price of raw  materials  has been
cyclical and volatile.  The Company generally has alternative suppliers for each
major raw  material  and the  Company  believes  that it could find  alternative
sources  of supply  should  it cease  doing  business  with any one of its major
suppliers.  The Company  attempts to offset raw material cost increases  through
selling price  increases;  however,  there can be no assurance  that the Company
will be successful in implementing  selling price increases or that  competitive
pricing pressure will not require the Company to adjust selling prices.  Results
of  operations  have  been  and  could  be  adversely   affected  by  delays  in
implementing,  or the  inability  of the  Company to  implement,  selling  price
increases to offset raw material  cost  increases.  For example,  the  Company's
results of  operations  in 1998,  1997 and 1996 were  adversely  affected by net
unrecovered  raw material  costs.  Furthermore,  there can be no assurance  that
chemical or other  suppliers  will not increase raw material costs in the future
or that the Company will be able to implement  selling price increases to offset
any such raw material cost increases.

       The  two  principal   chemicals  used  in  the  manufacture  of  flexible
polyurethane foam are TDI and polyol. Lyondell Chemical Company (formerly,  ARCO
Chemical  Company),  BASF  Corporation,  Bayer  Corporation and The Dow Chemical
Company are the Company's largest suppliers of TDI and polyol.  The price of TDI
and polyol is influenced by demand,  manufacturing  capacity and oil and natural
gas prices. Since September 1994, suppliers of TDI and polyol have increased the
price of these raw materials several times.  Significant  increases in these raw
material prices could have a material adverse effect on the financial  condition
or results of operations of the Company.

       A key raw material  used in the  manufacture  of carpet  cushion is scrap
foam. The Company internally  generates a substantial  portion of the scrap foam
used in the  production  of rebond  carpet  cushion  from its other  operations.
Historically,  the market price of rebond carpet cushion has fluctuated with the
market price of scrap foam. Thus, while the Company's gross margins with respect
to the portion of rebond carpet  cushion  produced with scrap foam  purchased on
the open market are fairly constant, the Company's gross margins with respect to
the portion of rebond carpet cushion  produced with  internally  generated scrap
foam are subject to  significant  variation  based on the market price of rebond
carpet cushion.

       Employees

       As of  December  31,  1998,  the  Company  employed  approximately  6,100
persons,  with  5,500  of  such  employees  involved  in  manufacturing,  415 in
administration  and 185 involved in sales and marketing  (these numbers  include
approximately  245  employees  terminated  during  the first  quarter  of 1999).
Approximately  1,200 of these  employees are located  outside the United States.
Also,   approximately  1,200  of  these  employees  are  covered  by  collective
bargaining  agreements  with labor unions,  which  agreements  expire on various
dates from 1999 through 2002. The Company considers relations with its employees
to be good.

                                       8

<PAGE>

       Competition

       The  flexible  polyurethane  foam  industry is highly  competitive.  With
respect to flexible polyurethane foam,  competition is based primarily on price,
quality of products and service.  The Company's  competitors in the polyurethane
foam industry  include E. R. Carpenter  Company,  Hickory Springs  Manufacturing
Company, Vitafoam, Inc., General Foam Corporation, Flexible Foam Products, Inc.,
and Future Foam, Inc. None of such  competitors  compete in all of the operating
segments in which the Company does business.

       Patents and Trademarks

       The Company owns various patents and trademarks  registered in the United
States and in numerous foreign countries.  The registered processes and products
were developed  through ongoing  research and development  activities to improve
quality, reduce costs and expand markets through development of new applications
for flexible polyurethane foam products. While the Company considers its patents
and trademarks to be a valuable  asset, it does not believe that its competitive
position is dependent on patent  protection or that its operations are dependent
upon any individual patent, trademark or tradename.

       Research and Development

       The Company believes it has a leading research and development capability
in the flexible  polyurethane foam industry.  The Company's primary research and
development facility is located in Eddystone,  Pennsylvania. The Company employs
approximately 41 full-time research and development employees.  Expenditures for
research  and  development  amounted to $3.3  million,  $2.4  million,  and $2.5
million for 1998, 1997, and 1996, respectively,  excluding expenditures by Crain
for research and development prior to its acquisition.

       The Company and Recticel, s.a. ("Recticel"), a European polyurethane foam
manufacturer and former partner of Foamex L.P., have exchanged  know-how,  trade
secrets,   engineering  and  other  data,  designs,   specifications,   chemical
formulations,  technical information,  market information and drawings which are
necessary or useful for the manufacture,  use or sale of foam products and it is
anticipated  that  they  will  continue  to do so in the  future.  The  Company,
Recticel  and Beamech  Group  Limited,  an  unaffiliated  third  party,  have an
interest in a Swiss corporation that develops new  manufacturing  technology for
the production of polyurethane foam including the VPF(R) manufacturing  process.
The Company,  Recticel and their  affiliates have a royalty-free  license to use
technology developed by the Swiss corporation.

ITEM 2.  PROPERTIES

       As of December 31,  1998,  the Company  conducted  its  operations  at 72
manufacturing and distribution  facilities,  including five facilities which the
Company intends to close as part of its  restructuring/consolidation  activities
primarily  associated with the Crain Acquisition,  of which 18 were owned and 54
were  leased.   Total  floor  space  in  use  at  the  owned  manufacturing  and
distribution facilities is approximately 3.3 million square feet and total floor
space  in  use  at the  leased  manufacturing  and  distribution  facilities  is
approximately  5.6 million  square  feet.  Sixty-four  of these  facilities  are
located  throughout 40 cities in the United States,  four facilities are located
throughout two cities in Canada and four facilities are located throughout three
cities in Mexico.  The 1999  annual  base  rental  with  respect to such  leased
facilities is  approximately  $11.1  million under leases  expiring from 1999 to
2007.  The Company does not  anticipate any problem in renewing or replacing any
of such leases expiring in 1999. In addition,  the Company has approximately 1.4
million square feet of idle space of which approximately 0.8 million is leased.

       The  Company  maintains  administrative  and sales  offices  in  Linwood,
Pennsylvania;  Fort Smith, Arkansas;  Atlanta, Georgia;  Chicago,  Illinois; St.
Louis, Missouri, Southfield, Michigan; and New York, New York.

                                       9
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

Environmental Matters

       The Company is subject to extensive and changing  federal,  state,  local
and foreign environmental laws and regulations,  including those relating to the
use, handling,  storage,  discharge and disposal of hazardous substances and the
remediation of  environmental  contamination,  and as a result,  is from time to
time involved in administrative and judicial  proceedings and inquiries relating
to  environmental  matters.  During 1998,  expenditures  in connection  with the
Company's compliance with federal,  state, local and foreign  environmental laws
and  regulations  did  not  have a  material  adverse  effect  on the  Company's
operations, financial position, capital expenditures or competitive position. As
of December 31, 1998, the Company had accruals of approximately $4.8 million for
environmental matters. During 1998, the Company established an allowance of $1.2
million relating to receivables from Trace for environmental indemnification due
to the financial  difficulties  of Trace (see Note 1 to  consolidated  financial
statements).

       The Clean Air Act Amendments of 1990 (the "1990 CAA Amendments")  provide
for the establishment of federal emission standards for hazardous air pollutants
including  methylene  chloride,  propylene oxide and TDI,  materials used in the
manufacturing  of foam. On December 27, 1996,  the United  States  Environmental
Protection Agency (the "EPA") proposed regulations under the 1990 CAA Amendments
that  will  require  manufacturers  of slab  stock  polyurethane  foam  and foam
fabrication plants to reduce emissions of methylene chloride. The final National
Emission  Standard for  Hazardous  Air  Pollutants  ("NESHAP")  was  promulgated
October 7,  1998.  NESHAP  requires  a  reduction  of  approximately  70% of the
emission  of  methylene  chloride  for the slab  stock foam  industry  effective
October 7, 2001. The Company does not believe  implementation  of the regulation
will  require  it to make  material  expenditures  due to the  Company's  use of
alternative technologies which do not utilize methylene chloride and its ability
to shift  current  production  to the  facilities  which  use  such  alternative
technologies.  The 1990 CAA  Amendments  also may  result in the  imposition  of
additional   standards   regulating   air  emissions  from   polyurethane   foam
manufacturers, but these standards have not yet been proposed or promulgated.

       In addition to federal regulatory requirements,  state laws have resulted
or could result in more stringent  regulations regarding the use and emission of
certain  chemicals.  For example,  in California,  methylene  chloride usage was
phased  out at the end of  1995,  while  in Kent,  Washington,  a  former  Crain
facility,  pursuant to consent  decrees as well as applicable  laws, must over a
period of time phase out methylene chloride usage. The Company believes that use
of methylene chloride in certain applications can be reduced to be in compliance
with certain state and federal laws.  Specifically,  through the  development of
the Enviro-Cure(R) process, which uses ambient or refrigerated air to remove the
heat of reaction  during the foam curing  process  and  various  carbon  dioxide
processes, the Company believes that it can reduce its methylene chloride usage.
The  Company  has  installed  the  Enviro-Cure(R)  process at its  manufacturing
facilities in Compton,  California; San Leandro,  California;  Elkhart, Indiana;
Tupelo,  Mississippi;  and Conover, North Carolina and carbon dioxide systems at
its Compton,  California;  Eddystone,  Pennsylvania;  Kent,  Washington;  Corry,
Pennsylvania;  and Orlando, Florida plants. There can be no assurance;  however,
that the  Enviro-Cure(R)  process will  successfully  reduce methylene  chloride
usage to be in compliance with applicable state and federal laws or that the use
of Enviro-Cure(R) will not lead to violations of other applicable  environmental
laws emissions.

       The Company has reported to  appropriate  state  authorities  that it has
found soil  contamination in excess of state standards at facilities in Orlando,
Florida; La Porte, Indiana; Conover, North Carolina;  Cornelius, North Carolina;
Fort Wayne,  Indiana;  and at a former facility in Dallas, Texas and groundwater
contamination  in  excess  of  state  standards  at the  Orlando,  Conover,  and
Cornelius  facilities.  The  Company  has begun  remediation  and is  conducting
further  investigations into the extent of the contamination at these facilities
and, accordingly, the extent of the remediation that may ultimately be required.
The actual cost and the  timetable of any such  remediation  cannot be predicted
with any degree of  certainty  at this time.  The Company  has  accruals of $3.3
million for the estimated cost of completing  remediation  at these  facilities.
The  Company is in the  process of  addressing  potential  contamination  at the
Morristown,  Tennessee facility,  and has submitted a sampling plan to the State
of Tennessee.  The extent of the contamination and responsible  parties, if any,
has not yet been  determined.  A former  owner may be liable for cleanup  costs;
nevertheless, the cost of remediation, if any, is not expected to be material.

                                       10

<PAGE>

       Federal  regulations  required  that by the end of 1998  all  underground
storage tanks  ("USTs") be removed or upgraded in all states to meet  applicable
standards.  The Company has upgraded all  operating  tanks at its  facilities in
accordance  with  these  regulations  and  recently  completed  the  closure  of
remaining  USTs  at two  sites  to meet  applicable  standards.  Some  petroleum
contamination  in  soils  was  found  at one of the  sites;  the  extent  of the
contamination  is  currently  being   investigated.   The  Company  has  accrued
approximately  $0.5 million for the estimated  remediation costs associated with
this site.  However,  the full extent of  contamination,  and  accordingly,  the
actual cost of such remediation cannot be predicted with any degree of certainty
at this time.  Based upon the  investigation  conducted  thus far,  the  Company
believes  that  its  USTs  do  not  pose a  significant  risk  of  environmental
liability. However, there can be no assurances that such USTs will not result in
significant environmental liability in the future.

       On April 10,  1997,  the  Occupational  Health and Safety  Administration
promulgated new standards  governing  employee  exposure to methylene  chloride,
which  is used  as a  blowing  agent  in  some  of the  Company's  manufacturing
processes.  The Company  does not  believe  that it will be required to make any
material expenditures to comply with these new standards.

       The  Company  has been  designated  as a  Potentially  Responsible  Party
("PRP") by the EPA with respect to nine sites with an estimated  total liability
to the Company for the nine sites of less than $1.0 million.  Estimates of total
cleanup costs and fractional  allocations of liability are generally provided by
the EPA or the committee of PRP's with respect to the specified site.
In each case, the liability of the Company is not considered to be material.

       Although it is possible that new information or future developments could
require the Company to reassess its potential  exposure  relating to all pending
environmental  matters,  including those described herein,  the Company believes
that,  based upon all currently  available  information,  the resolution of such
environmental  matters will not have a material  adverse effect on the Company's
operations,  financial position,  capital expenditures or competitive  position.
The possibility  exists,  however,  that new  environmental  legislation  and/or
environmental  regulations may be adopted, or other environmental conditions may
be found to exist, that may require  expenditures not currently  anticipated and
that may be material.

Legal Proceedings

       Stockholder Litigation

       Beginning  on or about  March 17,  1998,  six actions  (collectively  the
"Stockholder  Litigation")  were filed in the Court of  Chancery of the State of
Delaware,  New Castle County (the "Court"),  by stockholders of the Company. The
Stockholder  Litigation,  purportedly  brought as class actions on behalf of all
stockholders  of the  Company,  named the  Company,  certain  of its  directors,
certain of its officers,  Trace and Merger Sub as defendants  alleging that they
had breached their fiduciary duties to the plaintiffs and other  stockholders of
the Company  unaffiliated with Trace in connection with the original proposal of
Trace to acquire the publicly traded outstanding common stock of the Company for
$17.00  per  share.   The   complaints   sought,   among  other  things,   class
certification,  a declaration  that the defendants have breached their fiduciary
duties  to  the   class,   preliminary   and   permanent   injunctions   barring
implementation  of the proposed  transaction,  rescission of the  transaction if
consummated,  unspecified compensatory damages, and costs and attorneys' fees. A
stipulation  and order  consolidating  these six actions under the caption In re
Foamex International Inc.  Shareholders  Litigation,  Consolidated Civil Action,
No. 16259NC was entered by the Court on May 28, 1998.

       The parties to the  Stockholder  Litigation  entered into a Memorandum of
Understanding,  dated June 25,  1998 (the  "Memorandum  of  Understanding"),  to
settle the  Stockholder  Litigation,  subject  to,  inter alia,  execution  of a
definitive  stipulation  of  settlement  between the parties and approval by the
Court  following  notice  to  the  class  and  a  hearing.   The  Memorandum  of
Understanding  provided that as a result of, among other things, the Stockholder
Litigation and  negotiations  among counsel for the parties to the Memorandum of
Understanding,  a special meeting of stockholders would be held to vote upon and
approve the First Merger Agreement which provided,  among other things,  for the
Public Shares owned by stockholders of the Company  unaffiliated  with Trace and
its subsidiaries  (the "Public  Stockholders") to be converted into the right to
receive $18.75 in cash, without interest.

                                       11

<PAGE>

       The  Memorandum of  Understanding  also provided for  certification  of a
class, for settlement purposes only, consisting of the Public Stockholders,  the
dismissal of the  Stockholder  Litigation  with prejudice and the release by the
plaintiffs  and all members of the class of all claims and causes of action that
were or could have been asserted  against Trace,  the Company and the individual
defendants  in the  Stockholders  Litigation  or that  arise out of the  matters
alleged by plaintiffs.  Following the completion of the  confirmatory  discovery
which was provided for in the Memorandum of Understanding, on September 9, 1998,
the parties  entered into a definitive  Stipulation  of Settlement and the Court
set a hearing to consider whether the settlement  should be approved for October
27, 1998 (the "Settlement Hearing"). In connection with the proposed settlement,
the plaintiffs  intended to apply for an award of attorney's fees and litigation
expenses in an amount not to exceed $925,000,  and the defendants  agreed not to
oppose this  application.  Additionally,  the Company agreed to pay the cost, if
any,  of  sending  notice  of the  settlement  to the  Public  Stockholders.  On
September 24, 1998, a Notice of Pendency of Class Action, Proposed Settlement of
Class Action and Settlement  Hearing was mailed to the members of the settlement
class. On October 20, 1998, the parties to the Stockholder  Litigation requested
that the Court cancel the Settlement  Hearing in light of the announcement  made
by Trace on October 16,  1998,  that it had been unable to obtain the  necessary
financing for the  contemplated  acquisition  by Trace of the  Company's  common
stock at a price of  $18.75  per  share  which  was the  subject  matter  of the
proposed settlement. This request was approved by the Court on October 21, 1998,
and the Company issued a press release on October 21, 1998,  announcing that the
Court had cancelled the Settlement Hearing.

       On  November  10,  1998,  counsel for  certain of the  defendants  in the
Stockholder  Litigation  gave notice  pursuant to the  Stipulation of Settlement
that such  defendants  were  withdrawing  from the  Stipulation of Settlement in
light of the notice  given by Trace to the Company and the special  committee of
the Board of Directors on November 5, 1998 whereby  Trace  terminated  the First
Merger Agreement on the grounds that the financing condition in the First Merger
Agreement was incapable of being satisfied.

       On November 12, 1998, the plaintiffs in the Stockholder  Litigation filed
an Amended  Class  Action  Complaint  (the  "Amended  Complaint").  The  Amended
Complaint  named the  Company,  Trace,  Merger Sub, Mr.  Marshall S. Cogan,  Mr.
Andrea Farace, Dr. Stuart Hershon,  Mr. John Tunney, and Mr. Etienne Davignon as
defendants, alleging that they breached their fiduciary duties to plaintiffs and
the other Public  Stockholders  in connection  with the Second Merger,  that the
proposal  to acquire  the Public  Shares  for  $12.00  per share  lacked  entire
fairness,  that the  individual  defendants  violated  8 Del.  Code  ss.  251 in
approving  the Second Merger  Agreement,  and that Trace and Merger Sub breached
the Stipulation of Settlement.  On December 2, 1998,  plaintiffs served a motion
for a  preliminary  injunction,  seeking  an Order to  preliminarily  enjoin the
defendants from proceeding with,  consummating or otherwise effecting the merger
contemplated by the Second Merger Agreement.

       The  defendants  have  denied,  and  continue  to deny,  that  they  have
committed or have  threatened to commit any violation of law or breaches of duty
to  plaintiffs  or the  purported  class or any  breach  of the  Stipulation  of
Settlement.   The  defendants   intend  to  vigorously  defend  the  Stockholder
Litigation. If the Stockholder Litigation is adversely determined, it could have
a material adverse effect on the financial  position,  results of operations and
cash flows of the Company.

       In addition,  on or about  November 18, 1998, a putative class action was
filed in the United States  District Court for the Eastern  District of New York
on behalf of all persons who purchased common stock of the Company between March
16, 1998 and October 19, 1998, naming Trace as defendant and alleging that Trace
breached a contract between the putative class members and Trace. By order dated
January 8, 1999, the Court  transferred the action to the United States District
Court for the Southern  District of New York. Trace made a motion to dismiss the
action on February 8, 1999,  which motion is pending  before the Court,  and the
Court has  stayed all  discovery  in the  action  until the  motion is  decided.
Neither the Company nor any of the individual directors of the Company are named
as defendants in this litigation.

       Breast Implant Litigation

       As of April  16,  1999,  the  Company  and  Trace  were  two of  multiple
defendants  in actions  filed on behalf of  approximately  4,321  recipients  of
breast  implants  in various  United  States  federal  and state  courts and one
Canadian provincial court, some of which allege substantial damages, but most of
which allege  unspecified  damages for personal injuries of various types. Three
of these cases seek to allege claims on behalf of all breast implant  recipients
or other allegedly affected parties, but no class has been approved or certified
by the court. In addition, 

                                       12

<PAGE>

three  cases  have been  filed  alleging  claims on behalf of  approximately  39
residents of Australia, New Zealand,  England, and Ireland. The Company believes
that the number of suits and claimants may  increase.  During 1995,  the Company
and Trace were granted  summary  judgments and dismissed as defendants  from all
cases in the  federal  courts  of the  United  States  and the  state  courts of
California.  Appeals for these  decisions  were  withdrawn and the decisions are
final.

       Although  breast  implants  do not contain  foam,  certain  silicone  gel
implants  were  produced  using  a  polyurethane  foam  covering  fabricated  by
independent  distributors  or  fabricators  from  bulk foam  purchased  from the
Company or Trace.  Neither  the Company nor Trace  recommended,  authorized,  or
approved the use of its foam for these purposes. The Company is also indemnified
by Trace for any such liabilities relating to foam manufactured prior to October
1990.  Although  Trace has paid the Company's  litigation  expenses to date from
insurance proceeds Trace received,  there can be no assurance that Trace will be
able to continue to provide  such  indemnification.  While it is not feasible to
predict or determine the outcome of these actions, based on management's present
assessment of the merits of pending claims,  after consultation with the general
counsel of Trace, and without taking into account the  indemnification  provided
by Trace, the coverage provided by Trace and the Company's  liability  insurance
and potential  indemnity from the  manufacturers of polyurethane  covered breast
implants,  management  believes that the disposition of matters that are pending
or that may reasonably be anticipated to be asserted  should not have a material
adverse  effect  on either  the  Company's  or  Trace's  consolidated  financial
position or results of operations.  If management's  assessment of the Company's
liability with respect to these actions is incorrect,  such actions could have a
material  adverse  effect on the financial  position,  results of operations and
cash flows of the Company.

       Other Litigation

       On April 14, 1999, the Company received  communications  addressed to its
Board of Directors from certain of the Company's  stockholders regarding aspects
of the relationship between Trace and the Company. Such stockholders  questioned
the propriety of certain  relationships and related  transactions  between Trace
and the Company,  which previously have been disclosed in the Company's periodic
filings.  The Company's  Board of Directors,  in  consultation  with its special
counsel,  is in the process of evaluating such  communications and what actions,
if any, to take with respect thereto.

       In November  1997, a complaint  was filed in the United  States  District
Court for the  Southern  District of Texas  alleging  that  various  defendants,
including Crain through the use of the CARDIO(R)  process  licensed from a third
party, infringed on a patent held by plaintiff.  The Company is negotiating with
the licensor of the process for the  assumption  of the defense of the action by
the licensor, however, the action is in the preliminary stages, and there can be
no assurance as to the ultimate outcome of the action.  Such action could have a
material  adverse  effect on the financial  position,  results of operations and
cash flows of the Company.

       The Company is party to various  other  lawsuits,  both as defendant  and
plaintiff,  arising in the normal  course of business.  It is the opinion of the
Company that the disposition of these lawsuits will not,  individually or in the
aggregate,  have a material adverse effect on the financial  position or results
of  operations  of the Company.  If  management's  assessment  of the  Company's
liability with respect to these actions is incorrect,  such actions could have a
material adverse effect on the Company's consolidated financial position.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

       None


                                       13
<PAGE>
PART II
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
         MATTERS.

       The Company's common stock is traded through the National  Association of
Securities Dealers,  Inc. National Market System (the "NASDAQ") under the symbol
"FMXI".  As of April 21,  1999,  NASDAQ  required  the Company to use the symbol
"FMXIE" to indicate that the Company was  delinquent  in its  obligation to file
its Annual Report on Form 10-K for the year ended December 31, 1998. As the Form
10-K was filed with the  Securities  and Exchange  Commission on April 23, 1999,
the Company anticipates that the symbol will revert to "FMXI" on April 27, 1999.

       On April 15, 1999, NASDAQ advised the Company, in writing,  that a timely
filing  of its  Annual  Report  on Form 10-K is a  condition  for the  Company's
continuing  listing on the NASDAQ pursuant to NASDAQ's Rule 4310(c)(14) and that
in order to avoid  delisting,  the Company  must file its Annual  Report on Form
10-K by April 26, 1999.

       After the Company filed with the Securities and Exchange  Commission,  on
March 31, 1999,  for an  extension of time for filing its Annual  Report on Form
10-K pursuant to Rule 12b-25 of the Securities  Exchange Act of 1934, as amended
(the "Exchange Act"), the Company failed to file such Annual Report on Form 10-K
by April 15, 1999,  the date  required by the Exchange Act. Such failure to file
in a timely  fashion  will  affect the  Company's  ability to file  registration
statements on Form S-3, could subject the Company to  enforcement  action by the
Securities and Exchange  Commission and, as noted above, could have affected the
Company's ability to list its stock through the NASDAQ.

       NASDAQ  advised the Company in February  1999 that it was  reviewing  its
qualification  for continued  listing on NASDAQ because the Company did not hold
an Annual Meeting of  Stockholders  for 1997. The Company  advised NASDAQ of the
reasons why no meeting was held,  which  related to the proposed  going  private
transactions  that were the  subject of merger  agreements  in 1998,  and that a
meeting would be held in May 1999.

       The following table sets forth the high and low bid prices for the common
stock on the NMS based on information supplied by NASDAQ.

                                                  High              Low 
       1999
       Quarter Ended March 31, 1999             $13 3/8           $ 4 26/32

       1998
       Quarter Ended December 31, 1998          $14 3/8           $ 9 7/8
       Quarter Ended September 30, 1998         $17 9/16          $13 3/8
       Quarter Ended June 28, 1998              $18 1/8           $14 3/4
       Quarter Ended March 29, 1998             $18 3/8           $10 7/8

       1997
       Quarter Ended December 28, 1997          $14 3/4           $ 9 3/8
       Quarter Ended September 28, 1997         $15 1/4           $ 9 1/2
       Quarter Ended June 29, 1997              $15 7/8           $12
       Quarter Ended March 30, 1997             $22 1/8           $15

       As of April 9, 1999,  there were  approximately  150 holders of record of
the common stock.

       In December 1997, the Board of Directors approved a dividend of $0.05 per
share for  holders of record as of January 9, 1998;  and was paid on January 19,
1998.  This was the only cash  dividend  paid by the Company on its common stock
during the past two fiscal years.  The payment of any future  dividends  will be
determined  by the Board of  Directors  in light of  conditions  then  existing,
including  the  Company's   earnings,   financial  condition  and  requirements,
restrictions in financing agreements, business conditions and other factors. The
Company is a holding company whose assets consist  primarily of its wholly owned
subsidiaries Foamex L.P. and Foamex Carpet. Consequently,  the Company's ability

                                       14

<PAGE>

to pay dividends is dependent upon the earnings of Foamex L.P. and Foamex Carpet
and any  future  subsidiaries  of the  Company  and the  distribution  of  those
earnings to the Company and loans or advances by Foamex L.P.,  Foamex Carpet and
any such future  subsidiaries  of the  Company.  The ability of Foamex L.P.  and
Foamex  Carpet  to make  distributions  is  restricted  by the  terms  of  their
respective financing  agreements.  Due to such restrictions,  the Company is not
expected to have  access to the cash flow  generated  by Foamex L.P.  and Foamex
Carpet for the foreseeable future.

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

       The following table presents selected historical  consolidated  financial
data of the Company.  The results of operations of acquired businesses (as noted
below)  are  included  from  the  dates of their  respective  acquisitions.  The
financial data should be read in conjunction  with the financial  statements and
related notes thereto of the Company included elsewhere in this Annual Report on
Form 10-K.
<TABLE>
<CAPTION>
                                                                                 Fiscal Year (1) (2)
                                                  1998 (3)(4)        1997 (6)         1996 (7)         1995 (8)          1994   
                                                  -----------        --------         --------         --------          ----   
                                                                   (thousands, except for earnings per share)
<S>                                              <C>              <C>              <C>              <C>              <C>        
Statements of Operations Data:
   Net sales                                     $ 1,246,396      $   931,095      $   926,351      $   862,834      $   833,660
   Income (loss) from continuing
   operations                                        (69,853)           4,131           32,492          (50,750)          22,211
   Basic earnings (loss) per share from
   continuing operations                               (2.79)            0.16             1.28            (1.92)            0.83
   Diluted earnings (loss) per share from
   continuing operations                               (2.79)            0.16             1.26            (1.92)            0.83

Balance Sheet Data (at period end):
   Total assets                                  $   874,965      $   893,623      $   619,846      $   748,242      $   786,895
   Long-term debt, classified as current (5)         771,092               --               --               --               --
   Long-term debt                                      8,240          735,724          483,344          514,954          502,980
   Stockholders' equity (deficit)                   (204,119)        (113,419)         (58,103)          29,383           92,145
<FN>

(1)    The Company  changed its fiscal year to the  calendar  year during  1998.
       Prior to the  change,  the Company had a 52 or 53 week fiscal year ending
       on the Sunday closest to the end of the calendar  year.  Each fiscal year
       presented prior to 1998 was comprised of 52 weeks.

(2)    Fiscal years 1994 through 1995 were restated for discontinued operations.

(3)    Includes net  restructuring and other credits of $9.7 million (see Note 4
       to the  consolidated  financial  statements),  and  the  increase  in the
       valuation allowance for deferred tax assets.

(4)    The 1998  financial  statements  have been prepared  assuming the Company
       will  continue  as a  going  concern.  As  discussed  in  Note  1 to  the
       consolidated financial statements,  the Company has violated certain debt
       covenants and is seeking amendments;  however,  there can be no assurance
       that such  amendments  will be  obtained  and  therefore  the Company has
       reclassified the majority of its long-term debt as current,  which raises
       substantial  concern about the  Company's  ability to continue as a going
       concern.  In addition,  the Company has been informed by Trace that Trace
       has substantial debt obligations and may not have the financial resources
       to pay these  obligations  when due within the near future.  As a result,
       Trace creditors could foreclose or otherwise  attach the Company's stock.
       Such an event could result in the  acceleration of  substantially  all of
       the  Company's  debt.  Management's  plans in regard to these matters are
       described  in  Note  1 to  the  consolidated  financial  statements.  The
       financial  statements  do not include any  adjustments  that might result
       from the outcome of these uncertainties.

       Based on the realization of the deferred tax assets not being more likely
       than not, the Company has provided a valuation allowance of approximately
       $56.8  million  relating to net  deferred  tax assets as of December  31,
       1998.

                                       15

<PAGE>

(5)  As of December 31, 1998,  the Company has classified  approximately  $771.1
     million of  long-term  debt as  current.  The  Company is in the process of
     negotiating  amendments  to the debt  covenants  described  in (4) above to
     become  compliant  with its debt  agreements.  There  can be no  assurance,
     however, that the covenants will be amended. See Note 1 to the consolidated
     financial statements.

(6)  The Statements of Operations Data includes  restructuring and other charges
     of $21.1 million (see Note 4 to the consolidated financial statements), but
     does not  include  the results of  operations  of Crain which was  acquired
     December 23, 1997 since the effect is insignificant. The Balance Sheet Data
     included the estimated  fair value of the net assets  acquired in the Crain
     Acquisition.

(7)    Includes  restructuring  credits  of  $6.5  million  (see  Note  4 to the
       consolidated financial statements).

(8)    Includes restructuring and other charges of $41.4 million.
</FN>
</TABLE>


                                       16
<PAGE>
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

       The Company  operates in the flexible  polyurethane  and advanced polymer
foam products  industry.  As of December 31, 1998, the Company's  operations are
conducted through its wholly owned  subsidiaries,  Foamex L.P. and Foamex Carpet
and consist of the following  operating segments (i) foam products,  (ii) carpet
cushion products,  (iii) automotive  products,  (iv) technical  products and (v)
other,  which primarily  consists of certain foreign  manufacturing  operations,
corporate   expenses  not  allocated  to  the  other   operating   segments  and
restructuring and other charges. The net sales and income (loss) from operations
of these  operating  segments  for each of the last three years are  included in
Note 16 of the  consolidated  financial  statements.  The  following  discussion
should be read in conjunction  with the  consolidated  financial  statements and
related  notes  thereto of the Company  included  in this Annual  Report on Form
10-K.

       The  accompanying  financial  statements have been prepared  assuming the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 1 to the
consolidated  financial  statements and under "Liquidity and Capital  Resources"
below, the Company's  subsidiaries are not in compliance with certain  financial
covenants  contained in the agreements  governing  approximately  $480.4 million
principal  amount of  indebtedness.  As a result,  the Company has  reclassified
approximately  $771.1 million of long-term debt as current.  Such non-compliance
provides that the lenders under those  agreements  upon notice and lapse of time
can declare all of such indebtedness to be due. Notwithstanding the fact that to
date the lenders have not executed such rights and have granted  waivers of such
covenants through May 5, 1999 to enable the subsidiaries to negotiate amendments
of such  covenants;  there  can be no  assurance  that such  amendments  will be
obtained and therefore such  indebtedness  has been classified as current on the
Company's financial  statements.  Such classification raises substantial concern
about the Company's  ability to continue as a going  concern.  In addition,  the
Company has been informed by Trace that Trace had substantial  debt  obligations
that  were  due at the end of  December  1998  and did not  have  the  financial
resources to pay those  obligations.  Subsequently,  Trace  informed the Company
that waivers and/or  modifications of such indebtedness had been obtained for at
least the near  future;  however,  there can be no  assurance  that such waivers
and/or  modifications  will  remain in effect  prior to  obtaining  a  permanent
resolution.  If  Trace  were  to  default  on its  indebtedness  secured  by the
Company's common stock or other Trace creditors were to take steps  constituting
a default  under such  indebtedness  (such as filing an  involuntary  bankruptcy
petition),  and if the holders of such secured indebtedness were to foreclose on
the  Company's  common  stock  held by  Trace,  such  event  could  trigger  the
acceleration and put rights of  substantially  all of the debt of the Company as
described  above.  Although  management  believes that all such debt obligations
would be refinanced under such circumstances, there can be no assurance that the
Company or its subsidiaries would be able to do so. As a result, Trace creditors
could  foreclose  or otherwise  attach the  Company's  stock.  Such an event may
result  in  the  acceleration  of  substantially  all  of  the  Company's  debt.
Management's  plans in regard to these  matters are  described  in Note 1 to the
consolidated  financial statements.  In December 1998, the Company established a
reserve of $3.0 million against net operating  receivables  due from Trace.  The
financial  statements do not include any further  adjustments  that might result
from the outcome of these uncertainties.

       On March 16,  1999,  the  Company  announced  that it had  hired  John G.
Johnson,  Jr. as President,  Chief Executive Officer and director of the Company
following the resignation of Andrea Farace from the positions of Chairman of the
Board,  Chief  Executive  Officer and director of the Company.  The Company also
announced that it had hired JP Morgan  Securities Inc. as a financial advisor to
explore strategic alternatives to maximize shareholder value.

       In 1998, the Company received an unsolicited  buyout proposal from Trace,
the Company's principal  stockholder.  The Company entered into the First Merger
Agreement and the Second Merger Agreement which were subsequently  terminated by
Trace.  See  "Business  General".  The  Company  incurred  $6.5  million in fees
associated with the proposed transaction.

       On February 27, 1998, the Company and certain of its affiliates completed
the  GFI  Transaction.  See  "Business  -  General".  As a  result  of  the  GFI
Transaction the Company  recorded  transaction  expenses of  approximately  $1.6
million as other expense and an extraordinary  loss on the early  extinguishment
of debt in the amount of approximately $1.9 million (net of income taxes).

                                       17

<PAGE>

       Acquisitions and Disposition

       On December 23, 1997,  the Company  acquired  Crain  pursuant to a merger
agreement with Crain Holdings Corp.  ("Crain  Holdings") for a purchase price of
approximately $213.7 million, including the assumption of debt with a face value
of  approximately  $98.6 million (and an estimated  fair value of  approximately
$112.3  million).  In  addition,  fees and  expenses  associated  with the Crain
Acquisition  were  approximately  $13.2  million.  In connection  with the Crain
Acquisition, the Company approved a restructuring/consolidation plan for the two
entities.  The Company recorded  restructuring charges of $21.1 million relating
to the  restructuring  of the Company's  operations in connection with the Crain
Acquisition  and  related  transactions.   In  addition,  the  Company  recorded
approximately  $1.5 million of severance  and related costs and $8.5 million for
costs  associated  with the shut down and  consolidation  of certain  facilities
acquired in the Crain Acquisition.

       On October 6, 1997, the Company sold its  needlepunch  carpeting,  tufted
carpeting and artificial grass products business,  located in Dalton, Georgia to
Bretlin,  Inc.,  a  subsidiary  of The  Dixie  Group,  Inc.  The sale  price was
approximately  $41.0  million,  net  of  post-closing   adjustments  which  were
finalized  in December  1997.  The Company  used the net proceeds of the sale to
reduce borrowings under an existing Foamex L.P. credit facility by approximately
$38.8   million.   The  Company   incurred  an   extraordinary   loss  on  early
extinguishment of debt of approximately $0.6 million (net of income taxes).

       On June 12, 1997, the Company substantially  completed a refinancing plan
(the "1997 Refinancing  Plan") designed to reduce the Company's interest expense
and increase its financing  flexibility.  The 1997  Refinancing  Plan included a
tender  offer to purchase  $489.7  million of the  Company's  public  debt,  the
payment of $5.2 million of Foamex L.P.'s term loan borrowings  under an existing
credit facility and the payment of related fees and expenses.  In addition,  the
tender offer included amending the existing  indentures to remove  substantially
all of the restrictive covenants. The Company purchased $459.0 million of public
debt under the tender  offer and  incurred  an  extraordinary  loss on the early
extinguishment  of debt of  approximately  $42.0  million  (net  of  income  tax
benefits  of $25.7  million).  The 1997  Refinancing  Plan was  funded by $347.0
million of borrowings  under a new credit  facility (the "Credit  Facility") and
the net proceeds from the issuance of $150.0 million  principal amount of senior
subordinated  notes.  As a result of the 1997  Refinancing  Plan,  the Company's
total long-term debt increased by $63.9 million.  The 1997  Refinancing Plan was
designed to reduce the  Company's  interest  expense even after giving effect to
the additional borrowings. The Company's future interest expense will vary based
on a variety of factors, including fluctuations in interest rates in general. As
a result of the 1997  Refinancing  Plan,  variable rate debt  comprised a larger
percentage  of the Company's  overall  indebtedness  than in the past,  and as a
result,  future fluctuations in interest rates will have a greater impact on the
Company's interest expense than in the past.

       On October 1, 1997, the Company redeemed  approximately  $26.2 million of
the approximately  $30.7 million of the Company's  outstanding  public debt that
was not tendered as part of the 1997 Refinancing  Plan.  These  redemptions were
funded with  borrowings  under the Credit  Facility.  In  connection  with these
redemptions,   the  Company  incurred  an   extraordinary   loss  on  the  early
extinguishment of debt of approximately  $1.3 million (net of income taxes). The
remaining  outstanding  public debt of  approximately  $4.5 million that was not
tendered as part of the 1997  Refinancing Plan was defeased in February 1998 and
redeemed in June 1998.

       During  1996,  the Company sold Perfect Fit  Industries,  Inc.  ("Perfect
Fit") and JPS  Automotive  L.P.  ("JPS  Automotive")  which  comprised  the home
comfort products and automotive textile business segments,  respectively, of the
Company. The consolidated  financial statements of the Company were restated for
discontinued  operations  and include a net loss of $113.9 million (net of $34.9
million  income tax benefit) on the disposal of these business  segments,  which
includes  provisions for operating losses during the phase-out period. (See Note
9 to the consolidated financial statements).

       General

       The Company's  automotive foam customers are predominantly  OEMs or other
automotive  suppliers.  As such,  the sales of these  product lines are directly
related to the overall  level of  passenger  car and light truck  production  in
North  America.  Also,  the  Company's  sales are  sensitive to sales of new and
existing  homes,  changes in personal  disposable  income and  seasonality.  The

                                       18

<PAGE>

Company  typically  experiences two seasonally slow periods during each year, in
early July and in late December, due to scheduled plant shutdowns and holidays.

       Operating  results  for 1999 are  expected  to be  influenced  by various
internal and external factors.  These factors include,  among other things,  (i)
the Company's debt structure and the Company's  ability to successfully to amend
its Credit Facility and certain other  indebtedness,  (ii) the Company's capital
structure,  (iii) continued implementation of the consolidation plan with Crain,
(iv) additional raw material cost increases,  if any, by the Company's  chemical
suppliers,  (v) the  Company's  success in passing on to its  customers  selling
price   increases  to  recover  such  raw  material  cost   increases  and  (vi)
fluctuations in interest rates.

RESULTS OF OPERATIONS

       In the fourth  quarter of 1998 the Company  adopted  SFAS 131.  This rule
required  companies to report  information  about their business segments on the
basis  of  how  they  are  managed  and   evaluated   by  the  chief   operating
decision-makers.  Each of the operating  segments is headed by an executive vice
president who is responsible  for developing  plans and directing the operations
of the segment.

       The Company's  reportable  business  segments are foam  products,  carpet
cushion products,  automotive products and technical products. The foam products
segment  manufactures and markets foam used by the bedding  industry,  furniture
industry  and  the  retail   industry.   The  carpet  cushion  products  segment
distributes prime, rebond, sponge rubber and felt carpet cushion. The automotive
products segment supplies foam primarily for automotive interior applications to
automotive  manufacturers and to industry sub suppliers.  The Technical Products
segment  manufactures and markets  reticulated  foams and other custom polyester
and  polyether  foams  for   industrial,   specialty  and  consumer  and  safety
applications.

       The  "other"  column  in  the  table  below  represents  certain  foreign
manufacturing  operations  in Mexico and Asia that do not meet the  quantitative
threshold for determining reportable segments,  corporate expenses not allocated
to the other operating segments and restructuring and other charges. Total asset
information by operating  segment is not reported  because many of the Company's
facilities produce products for multiple operating  segments.  Data for 1997 and
1996 has been restated to reflect the implementation of SFAS 131.

<TABLE>
<CAPTION>
                                                 Carpet
                                   Foam         Cushion     Automotive      Technical
                                 Products       Products       Products      Products        Other         Total      
                                 --------       --------       --------      --------        -----         -----      
<S>                              <C>          <C>            <C>              <C>          <C>        <C>       
1998
Net sales                        $559,690     $300,791       $285,190         $79,140      $21,585    $1,246,396
Income (loss) from operations      35,313       12,005         16,788          14,571       (3,645)       75,032
Depreciation and amortization      18,300        5,529          6,424           2,929        2,203        35,385

1997
Net sales                         334,900      273,920        225,892          76,254       20,129       931,095
Income (loss) from operations      30,665        8,548         24,638          17,886      (26,637)       55,100
Depreciation and amortization      10,539        4,407          3,550           2,470        1,081        22,047

1996
Net sales                         325,067      291,338        227,151          70,325       12,470       926,351
Income (loss) from operations      32,120       18,503         28,397          17,897        4,527       101,444
Depreciation and amortization      10,935        4,450          3,127           2,484        1,357        22,353
</TABLE>

1998 Compared to 1997

       Net sales for 1998 were $1,246.4 million as compared to $931.1 million in
1997, an increase of $315.3 million or 33.9%.  Income from operations  increased
$19.9 million or 36.2% to $75.0 million for 1998 from $55.1 million in 1997. The
increase in net sales and income from  operations was primarily  associated with
the Crain Acquisition in December 1997, reduced  restructuring and other charges
and the increase in  automotive  lamination  products  during the latter part of
1998 which were  offset by the sale of the Dalton,  Georgia  facility in October

                                       19

<PAGE>

1997. During 1998, selling,  general and administrative expenses increased $22.0
million  primarily due to costs associated with the integration of Crain and the
Company (the  "Transition").  Also during 1998, the Company  recorded  income of
$15.1 million for the reversal of 1997 restructuring charges and $5.4 million of
other charges  associated with the impairment of goodwill on the Montreal Canada
operations ($2.3 million), and an allowance for receivables due from Trace ($3.1
million).

       Foam Products

       Foam products net sales for 1998  increased  67.1% to $559.7 million from
$334.9  million  in 1997 and income  from  operations  increased  15.2% to $35.3
million  (6.3%  of net  sales)  from  $30.7  million  (9.2% of net  sales).  The
increases in net sales and income from operations were primarily associated with
the Crain  Acquisition in December 1997. The decrease in income from  operations
as a  percentage  of net sales  was  primarily  the  result of (i) costs of $4.0
million  associated with the  Transition,  including  inventory  adjustments for
facilities  affected by the  consolidation  of  manufacturing  facilities,  (ii)
operating inefficiencies and logistics costs of $2.5 million associated with the
sales of juvenile and other  consumer  products sold through mass  merchandisers
and discount stores;  (iii) operating losses and  inefficiencies of $1.0 million
resulting from the fires at Orlando, Florida and Cornelius, North Carolina, (iv)
selling  price  decreases of $0.5 million  resulting  from  competitive  pricing
pressures due to market share challenges from competitors and the (v) inherently
lower margins of Crain when compared with the Company's  historical  margins. In
addition,  operating  margins  decreased  in 1998 since the Company  carried the
operating costs of both companies during the Transition.

       Carpet Cushion Products

       Carpet  cushion  products  net  sales for 1998  increased  9.8% to $300.8
million from $273.9  million in 1997  primarily  due to an increase in net sales
associated with the Crain Acquisition in December 1997 offset by the sale of the
Dalton, Georgia facility in October 1997. Income from operations increased 40.4%
to $12.0 million (4.0% of net sales) from $8.5 million (3.1% of net sales).  The
increase was primarily  associated  with the Crain  Acquisition in December 1997
and was offset by increased  costs of $1.0 million  associated  with the Orlando
fire,  costs  related  to the  Transition  of $0.9  million  and the sale of the
Dalton, Georgia facility. In addition,  Crain's carpet cushion products provided
slightly higher margins than the Company's products.

       Automotive Products

       Automotive  products net sales for 1998 increased 26.3% to $285.2 million
from $225.9 million in 1997 and income from operations  decreased 31.9% to $16.8
million  (5.9% of net  sales)  from  $24.6  million  (10.9% of net  sales).  The
increase  in net sales  was  associated  with  increased  volume  of  lamination
products. Income from operations decreased principally as a result of (i) higher
costs of $3.0  million  incurred  during  the  start up phase of new  lamination
business at the Mexican border,  (ii) contract price reductions of approximately
$1.1 million and (iii) losses of $1.0 million  associated with the production of
thermoformable headliners.

       Technical Products

       Technical  Products net sales for 1998  increased  3.8% to $79.1  million
from $76.3 million in 1997 and income from  operations  decreased 18.5% to $14.6
million  (18.4% of net  sales)  from $17.9  million  (23.5% of net  sales).  The
increased net sales were  primarily  associated  with the  Company's  industrial
gasketing  and sealing  products.  The  decrease in income from  operations  was
primarily  associated with a higher mix of lower margin industrial  products and
production inefficiencies on certain products.

       Other

       Other  primarily  consists of certain foreign  manufacturing  operations,
corporate   expenses  not  allocated  to  the  other   operating   segments  and
restructuring and other charges.  The increase in net sales associated with this
segment was associated with the facility in Mexico City that began operations in
the second half of 1997.  The increase in income from  operations  was primarily
associated with a reversal of $15.1 million of  restructuring  charges set up in
1997,  offset by accounts  receivable and inventory  problems of $8.5 million at
the Mexico City facility, start up costs of $2.5 million for the Company's Asian
subsidiary and duplicate administrative costs incurred during the Transition.

                                       20

<PAGE>

       Income (Loss) from Continuing Operations

       Income  (loss) from  continuing  operations  decreased to a loss of $69.8
million for 1998 as compared to income of $4.1 million in 1997.  The decrease is
primarily due to an increase of approximately $21.7 million in interest and debt
issuance expense, a decrease of $16.5 million in other income (expense), net and
an increase of $55.7 million in the provision for income taxes, discussed below,
offset by an increase in income from operations,  as previously  discussed.  The
increase in interest  and debt  issuance  expense is  primarily  due to the debt
incurred in connection with the Crain Acquisition offset by the favorable effect
of the 1997 Refinancing Plan. The decrease in other income (expense), net is due
to  primarily  associated  with (i)  costs of $2.1  million  related  to the GFI
Transaction,  (ii) foreign currency losses of $3.0 million in Mexico and Canada,
(iii) fees of $6.5 million  associated with financial and legal advisors used by
the  Company  in the  buy-out  proposal  (as  discussed  previously)  and (iv) a
writedown of $1.1 million in the investment in Trace Global Fund.

       Income Taxes

       The 1998  provision  for  income  taxes of $58.2  million  represents  an
increase in valuation  allowance of $56.2 million for deferred tax assets as the
Company has determined that as of December 31, 1998, it will be more likely than
not to have  insufficient  future income to utilize its net operating losses and
realize  other  deferred  income  tax  assets.  See Note 11 to the  consolidated
financial  statements.  In  addition,  the  Company  did not  recognize  the tax
benefits  associated with losses in Mexico since it appears likely that such net
operating losses will not be able to be realized in the near future. At December
31,  1998,  the  Company  had  approximately  $120.0  million of regular tax net
operating loss  carryforwards for federal income tax purposes expiring from 2010
to 2012.

       Extraordinary Loss

       The  extraordinary  loss on early  extinguishment of debt in 1998 of $1.9
million (net of $1.3 million income tax benefit) was primarily  associated  with
the write-off of debt issuance costs in connection with the GFI Transaction. The
extraordinary loss on early extinguishment of debt in 1997 of $44.5 million (net
of $27.3 million income tax benefit)  primarily relates to the write-off of debt
issuance costs and redemption premiums associated with the early  extinguishment
of long-term debt in connection with the 1997 Refinancing Plan.

1997 Compared to 1996

       Net sales for 1997 were $931.1  million as compared to $926.4  million in
1996,  an  increase  of $4.7  million  or 0.5%.  The  increase  in net sales was
primarily  associated with the foam products  segment due to higher sales volume
of bedding related  products and expansion of facilities in Mexico City.  Income
from  operations  was $55.1  million for 1997 as  compared to $101.4  million in
1996. The decrease was primarily due to unrecovered raw material cost increases,
product  mix  change to lower  margin  products,  1997  restructuring  and other
charges of $21.1 million as compared to a  restructuring  credit of $6.5 million
in 1996, and an increase in selling, general and administrative expenses of $8.8
million for 1997 as compared to 1996. The 1997  restructuring  and other charges
are related to the restructuring of the Company's  operations in connection with
the Crain  Acquisition.  The  increase  in selling,  general and  administrative
expenses is the result of increases in the provision for uncollectible accounts,
employee compensation and incentives, research and development costs, and travel
and  promotion  costs   associated  with  the  launching  of  new  products  and
international expansion.

       Foam Products

       Foam products net sales for 1997  increased  3.0% to $334.9  million from
$325.1 million in 1996 primarily due to increased net sales volume from both new
and  existing  customers of bedding  related  products.  Income from  operations
decreased  4.5% to $30.7 million (9.2% of net sales) from $32.1 million (9.9% of
net sales).  The decreases were primarily  associated with unrecovered  material
cost increases offset by an increase in net sales.

                                       21

<PAGE>

       Carpet Cushion Products

       Carpet  cushion  products  net  sales for 1997  decreased  6.0% to $273.9
million from $291.3 million in 1996.  Income from operations  decreased 53.8% to
$8.5 million  (3.1% of net sales) from $18.5  million  (6.4% of net sales).  The
decrease  was  primarily  associated  with (i) the sale in  October  1997 of the
Dalton,  Georgia  facility  which  manufactured  needlepunch  carpeting,  tufted
carpeting, and artificial grass products and had net sales of approximately $8.3
million in the fourth  quarter of 1996,  (ii) reduction in rebond carpet cushion
selling  prices due to lower trim material  costs,  and (iii) a shift in product
mix from higher price carpet cushion to lower price carpet cushion.

       Automotive Products

       Automotive  products net sales for 1997  decreased 0.6% to $225.9 million
from $227.2 million in 1996.  Income from  operations  decreased  13.2% to $24.6
million  (10.9% of net  sales)  from $28.4  million  (12.5% of net  sales).  The
decrease  in  operating  margin was  associated  with a shift in product  mix to
increased  volume of lower margin  lamination  products  from higher margin roll
goods.

       Technical Products

       Technical  Products net sales for 1997  increased  8.5% to $76.3  million
from $70.3  million  in 1996  primarily  due to  increased  net sales  volume of
commercial  and  industrial  products.  Income from  operations was unchanged at
$17.9 million  (23.5% of net sales) in 1997 compared to $17.9 million  (25.4% of
net sales) in 1996. The decrease in percentage of income from  operations to net
sales was  primarily  associated  with a higher mix of lower  margin  industrial
products in 1997 as compared to higher margin commercial products in 1996.

       Other

       Other  primarily  consists of certain foreign  manufacturing  operations,
corporate   expenses  not  allocated  to  the  other   operating   segments  and
restructuring  and other  charges.  The  increase  in net  sales  was  primarily
associated  with the  expansion of  facilities  in Mexico City.  The decrease in
income from operations was primarily associated with the start up in Mexico City
and $21.1 million of restructuring and other charges in 1997 as compared to $6.5
million of income in 1996.

       Income from Continuing Operations

       Income from  continuing  operations was $4.1 million for 1997 as compared
to $32.5  million in 1996.  The decrease is primarily  due to the reasons  cited
above  offset by a  decrease  in  interest  and debt  issuance  expense  of $3.3
million.  The decrease in interest and debt issuance expense is primarily due to
the favorable impact of the 1997 Refinancing Plan.

       Income Taxes

       The  1997  effective  income  tax  rate  for  continuing  operations  was
approximately  38.0% as  compared  to 33.9%  for  1996.  The 1996  income  taxes
included  a net  benefit  of  approximately  $3.0  million  associated  with the
reversal of valuation  allowances offset by the impact of permanent  differences
and other  matters.  The reversal of the  valuation  allowances  resulted from a
determination  in 1996 that a subsidiary that files separate  federal income tax
returns would more likely than not have sufficient taxable income to utilize its
net  operating  loss  carryforwards  and other  deferred  income tax assets as a
result of improved  continuing  operations and  divestiture of a subsidiary that
historically incurred taxable losses.

       Discontinued Operations

       The loss from  discontinued  operations  of $2.0  million  (net of income
taxes)  in 1997  relates  to the final  post-closing  settlement  regarding  the
December 1996 sale of JPS Automotive.  The loss from discontinued  operations of
$114.5  million  in 1996  relates  to the net loss on the 1996  sale of the home
comfort  products and  automotive  textile  business  segments  which  consisted

                                       22

<PAGE>

primarily of the net assets of Perfect Fit and JPS Automotive, respectively, and
the operating income (loss) of both entities  through their  respective  closing
dates.  See  Note  9  to  the  consolidated  financial  statements  for  further
discussion.

       Extraordinary Loss

       The extraordinary  loss on early  extinguishment of debt of $44.5 million
(net of income taxes) primarily  relates to the write-off of debt issuance costs
and redemption  premiums  associated with the early  extinguishment of long-term
debt in connection with the 1997 Refinancing Plan.

Liquidity and Capital Resources

       Liquidity

       The Company is a holding company whose  operations are conducted  through
its wholly owned  subsidiaries,  Foamex L.P. and Foamex  Carpet.  The  liquidity
requirements of the Company consist primarily of the operating cash requirements
of its two principal subsidiaries.

       Foamex L.P.'s operating cash requirements  consist principally of working
capital   requirements,   scheduled   payments  of  principal  and  interest  on
outstanding  indebtedness  and capital  expenditures.  The Company believes that
cash flow from Foamex  L.P.'s  operating  activities,  cash on hand and periodic
borrowings under the Credit Facility,  if necessary,  (provided that such Credit
Facility is successfully  amended,  as described below) will be adequate to meet
Foamex  L.P.'s  liquidity  requirements.  The  ability  to meet  such  liquidity
requirements  could be impaired  if Foamex L.P.  were to fail to comply with any
covenants  contained in the Credit Facility and such noncompliance was not cured
by Foamex L.P. or waived by the lenders. Foamex L.P. amended its Credit Facility
in March 1999. The amendment adjusted financial  covenants,  among other things,
as of December 31, 1998 and provided for future measurement  periods taking into
account Foamex L.P.'s estimated  operating  results and financial  condition for
1998 and management  expectations  regarding future measurement  periods. As the
Foamex L.P. actual 1998 net loss was worse than originally  estimated,  on April
15, 1999,  Foamex L.P.  obtained a waiver  through May 5, 1999, of the financial
covenants contained in the Credit Facility and certain events of default arising
out of its  Mexican  operations,  in order to enable it to  negotiate  a further
amendment  of the  Credit  Facility.  There  can be no  assurance  that  such an
amendment  will be obtained,  and the failure to obtain such an amendment  would
have a material  adverse  effect on Foamex L.P. and the Company.  The ability of
Foamex L.P. to make  distributions  to the Company is restricted by the terms of
its financing  agreements;  therefore,  neither the Company nor Foamex Carpet is
expected  to have  access to the cash flow  generated  by  Foamex  L.P.  for the
foreseeable future.

       Foamex  Carpet's  operating  cash  requirements  consist  principally  of
working capital  requirements,  scheduled  payments of principal and interest on
outstanding  indebtedness  and capital  expenditures.  The Company believes that
cash flow from Foamex Carpet's operating  activities,  cash on hand and periodic
borrowings  under Foamex  Carpet's  credit  facility (the "Foamex  Carpet Credit
Facility"),  if necessary,  (provided that such Foamex Carpet Credit Facility is
successfully  amended,  as  described  below)  will be  adequate  to meet Foamex
Carpet's liquidity requirements. The ability to meet such liquidity requirements
could be  impaired if Foamex  Carpet  were to fail to comply with any  covenants
contained in the Foamex Carpet Credit Facility and other financing  arrangements
and such  noncompliance was not cured by Foamex Carpet or waived by the lenders.
Foamex  Carpet  amended the Foamex Carpet  Credit  Facility and other  financing
arrangements in March 1999. The amendments adjusted financial  covenants,  among
other  things,  as of December  31,  1998 and  provided  for future  measurement
periods  taking into account Foamex  Carpet's  estimated  operating  results and
financial  conditions  for 1998 and  management  expectations  regarding  future
measurement  periods.  As the Foamex  Carpet actual 1998 earnings was worse than
originally projected,  on April 15, 1999, Foamex Carpet obtained waivers through
May 5, 1999,  of the financial  covenants  contained in the Foamex Carpet Credit
Facility and other  financial  arrangements,  in order to enable it to negotiate
further  amendments of the Foamex Carpet Credit Facility and the other financial
arrangements.  There can be no assurance that such  amendments will be obtained,
and the failure to obtain such amendments  would have a material  adverse effect
on  Foamex  Carpet  and the  Company.  The  ability  of  Foamex  Carpet  to make
distributions  to the  Company  is  restricted  by the  terms  of its  financing
agreements;  therefore,  neither the Company nor Foamex L.P. is expected to have
access to the cash flow generated by Foamex Carpet for the foreseeable future.

                                       23

<PAGE>

       Certain credit  agreements and promissory notes of Foamex L.P. and Foamex
Carpet  pursuant to which  approximately  $505.2 million of debt has been issued
contain provisions that would result in the acceleration of such indebtedness if
Trace were to cease to own at least 30% of the  outstanding  common stock of the
Company.  Similarly,  certain  indentures  of Foamex  L.P.  and  Foamex  Capital
Corporation  relating to  approximately  $248.0  million of senior  subordinated
notes contain  provisions  that provide the holders of such senior  subordinated
notes with the right to require the issuers  thereof to  repurchase  such senior
subordinated  notes at a price in cash equal to 101% of the aggregate  principal
amount thereof,  plus accrued and unpaid interest thereon,  if Trace falls below
certain  specified  ownership  levels of common stock and other persons or group
owns a greater  percentage  of common  stock than  Trace.  Trace has  previously
informed the Company that it had substantial  debt  obligations that were due at
the end of December 1998 and did not have the  financial  resources to pay those
obligations.  Subsequently,  Trace  informed  the Company  that  waivers  and/or
modifications  of such  indebtedness  had been  obtained  for at least  the near
future;   however,   there  can  be  no  assurance   that  such  waivers  and/or
modifications  will remain in effect prior to obtaining a permanent  resolution.
If Trace were to default on its  indebtedness  secured by the  Company's  common
stock or other Trace  creditors were to take steps  constituting a default under
such indebtedness (such as filing an involuntary  bankruptcy  petition),  and if
the holders of such secured  indebtedness  were to  foreclose  on the  Company's
common stock held by Trace,  such event could trigger the  acceleration  and put
rights of  substantially  all of the debt of the  Company  as  described  above.
Although  management believes that all such debt obligations would be refinanced
under such  circumstances,  there can be no  assurance  that the  Company or its
subsidiaries would be able to do so.

       The  accompanying  financial  statements have been prepared  assuming the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 1 to the
consolidated  financial  statements,  the  Company's  subsidiaries  are  not  in
compliance  with  certain  financial   covenants  contained  in  the  agreements
governing  approximately  $480.4 million principal amount of indebtedness.  As a
result, the Company has reclassified  approximately  $771.1 million of long-term
debt  as  current.   Such  non-compliance   provides  the  lenders  under  those
agreements,  with the right, upon the notice and lapse of time to declare all of
such  indebtedness  to be due. To date the lenders have not executed such rights
and have granted the Company a waiver of such  covenants  through May 5, 1999 to
enable the Company to negotiate an amendment of such covenants;  there can be no
assurance that such amendments will be obtained and therefore such  indebtedness
has been  classified  as current on the  Company's  financial  statements.  Such
classification  raises substantial doubt about the Company's ability to continue
as a going  concern.  In addition,  the Company has been  informed by Trace that
Trace had substantial debt obligations that were due at the end of December 1998
and did not have the financial resources to pay those obligations. Subsequently,
Trace   informed  the  Company  that  waivers  and/or   modifications   of  such
indebtedness had been obtained for at least the near future;  however, there can
be no assurance  that such waivers  and/or  modifications  will remain in effect
prior to  obtaining  a  permanent  resolution.  If Trace  were to default on its
indebtedness secured by the Company's common stock or other Trace creditors were
to take steps  constituting a default under such indebtedness (such as filing an
involuntary   bankruptcy   petition),   and  if  the  holders  of  such  secured
indebtedness were to foreclose on the Company's common stock held by Trace, such
event could trigger the acceleration and put rights of substantially  all of the
debt of the Company as described above.  Although  management  believes that all
such debt obligations would be refinanced under such circumstances, there can be
no assurance that the Company or its  subsidiaries  would be able to do so. As a
result, Trace creditors could foreclose or otherwise attach the Company's stock.
Such an  event  may  result  in the  acceleration  of  substantially  all of the
Company's  debt.  In December  1998,  the Company  established a reserve of $3.0
million  against  net  operating  receivables  due  from  Trace.  The  financial
statements  do not include any further  adjustments  that might  result from the
outcome of these uncertainties.

       The Company has reclassified substantially all of its debt from long-term
debt to reflect such debt as current  liabilities.  If,  however,  the Company's
subsidiaries are able to amend the relevant covenants in their credit agreements
and other  financial  arrangements,  the Company may be able to  reclassify  the
liabilities  as long-term  debt.  However,  there can be no  assurance  that the
Company's  subsidiaries will be able to obtain the necessary  amendments,  or if
obtained,  that it will  once  again be able to  classify  such  liabilities  as
long-term.

       Cash and cash equivalents remained fairly constant during 1998 with $12.6
million at December 31, 1998 as compared to $12.0  million at December 28, 1997.
Cash and cash  equivalents  decreased $10.2 million during 1997 to $12.0 million
at December 28, 1997 from $22.2  million at December 29, 1996  primarily  due to
the  decrease  in net cash  provided  by  operating  activities.  Excluding  the
reclassification  of other long-term debt to current,  working capital decreased

                                       24

<PAGE>

$4.4  million  during 1998 to $134.1  million at  December  31, 1998 from $138.5
million at December 28, 1997  primarily  due to a $8.2  million  increase in net
operating  assets  and  liabilities  and a $12.7  million  decrease  in  accrued
restructuring  and plant  consolidation  offset by a $22.5  million  increase in
accrued liabilities. Net operating assets and liabilities (comprised of accounts
receivable,  inventories and accounts payable)  increased $8.2 million to $172.5
million at December 31, 1998 as compared to $164.3 million at December 28, 1997.
The  increase  was  primarily  due  to  increases  in  accounts  receivable  and
inventories offset by an increase in accounts payable.  The increase in accounts
receivable was primarily  associated with the timing of cash receipts from major
customers.  The increase in inventories was primarily due to year-end  purchases
of raw  materials to maintain  favorable  pricing with  chemical  suppliers  and
projected net sales during the first  quarter of 1999. In addition,  inventories
increased  because of lower than anticipated  sales during the month of December
1998. The increase in accounts payable is primarily associated with the year-end
purchase of raw material inventories.  The decrease in accrued restructuring and
plant  consolidation  was  primarily  associated  with the  payment of costs for
closure of facilities during 1998. The increase in other accrued  liabilities is
primarily associated with an increase in workers compensation liabilities,  $7.3
million  for  checks  issued to be funded  under the Credit  Facility  and other
general increases.  Working capital increased $1.9 million during 1997 to $138.5
million at December 28, 1997 from $136.6  million at December 29, 1996 primarily
due to the increase in operating  assets.  Net operating  assets and liabilities
(comprised of accounts  receivable,  inventories and accounts payable) increased
$21.4  million  during 1997 to $164.3  million at December  28, 1997 from $142.9
million at December 29, 1996  primarily due to increases in accounts  receivable
and inventories  offset by an increase in accounts payable.  These increases are
primarily    associated    with   the   Crain    Acquisition.    The   Company's
restructuring/consolidation   plan  includes  accruals  of  approximately  $16.7
million of cash  charges of which $4.7  million is  expected  to be paid  during
1999.

       As of December 31, 1998,  there were $139.4  million of revolving  credit
borrowings, at an average interest rate of 7.89%, under the Credit Facility with
$6.5 million available for borrowing and approximately  $49.1 million of letters
of credit outstanding which are supported by the Credit Facility.  Borrowings by
Foamex Canada Inc. as of December 31, 1998 were approximately  $2.9 million,  at
an interest rate of 7.25%, under Foamex Canada Inc.'s revolving credit agreement
with unused  availability of  approximately  $2.3 million.  Foamex Carpet had no
outstanding  borrowings  under the Foamex Carpet Credit Facility at December 31,
1998 with unused availability of $19.3 million and including  approximately $0.7
million of  letters  of credit  outstanding  which are  supported  by the Foamex
Carpet Credit Facility.

       Cash Flow from Operating Activities

       Cash flow from  continuing  operations was a negative $13.9 million and a
positive $0.4 million and $41.3 million in 1998,  1997, and 1996,  respectively.
Cash flow from  continuing  operations  decreased  in 1998 as  compared  to 1997
primarily  as a result  of the loss from  continuing  operations,  as  described
above,  and an increased  use of cash by the operating  assets and  liabilities.
Cash flow from  continuing  operations  decreased  in 1997 as  compared  to 1996
primarily  as a result of the use of  approximately  $44.0  million  of cash for
premiums and costs associated with the 1997 Refinancing Plan offset by decreased
cash used for operating assets and liabilities.

       Cash Flow from Investing Activities

       From the beginning of 1996 through 1998, the Company spent  approximately
$90.5  million on  capital  improvements.  The  expenditures  included:  (i) the
construction  of a facility  in Mexico  City,  Mexico to  improve  manufacturing
efficiencies  and to meet the growing local demand for foam  products;  (ii) the
expansion  and  modernization  of a  facility  in  Orlando,  Florida  to improve
manufacturing efficiencies, (iii) installation of more efficient foam production
line systems and fabricating  equipment in a number of manufacturing  facilities
and (iv)  installation  of flame  laminators to support the increased  volume of
automotive   laminated   products.   The  Company   expects  to  reduce  capital
expenditures from historical levels for the foreseeable future.

       On December 23, 1997,  the Company  acquired  Crain  pursuant to a merger
agreement  with Crain  Holdings  for a purchase  price of  approximately  $213.7
million, which was primarily funded with $118.0 million of bank borrowings under
the  Credit   Facility  and  the  assumption  of  debt  with  a  face  value  of
approximately $98.6 million (and an estimated fair value of approximately $112.3
million).   Fees  and  expenses  associated  with  the  Crain  Acquisition  were
approximately $13.2 million.

                                       25
<PAGE>

       On October 6, 1997, the Company sold its  needlepunch  carpeting,  tufted
carpeting and artificial grass products business,  located in Dalton, Georgia to
Bretlin,  Inc.,  a  subsidiary  of The Dixie  Group,  Inc.  The sales  price was
approximately  $41.0  million,  net  of  post-closing   adjustments  which  were
finalized in December 1997.

       During  1996,  the Company  received net sale  proceeds of  approximately
$59.5 million in connection with the sale of Perfect Fit ($42.7 million) and the
sale of JPS Automotive  ($16.8  million).  The Perfect Fit sale was finalized in
1996 and the net sale proceeds were used to  repurchase  long-term  debt and for
the payment of certain retained  liabilities.  The JPS Automotive sale price was
finalized in December 1997.

       Cash Flow from Financing Activities

       In  connection  with the GFI  Transaction  in  March  1998,  the  Company
extinguished  approximately  $125.1  million  of term  loans  under  the  Credit
Facility  funded with $129.0 million of new term loan agreements by Foam Funding
LLC. See Note 13 to the consolidated financial statements.  In addition,  during
March 1998,  Foamex L.P. defeased the outstanding $4.5 million of senior secured
notes due 2000.

       On  June  12,  1997,  the  Company   substantially   completed  the  1997
Refinancing Plan designed to reduce the Company's  interest expense and increase
its financing flexibility.  The 1997 Refinancing Plan included a tender offer to
purchase  $489.7  million of the  Company's  public  debt,  the  payment of $5.2
million of Foamex L.P.'s term loan borrowings  under an existing credit facility
and the payment of related  fees and  expenses.  In  addition,  the tender offer
included  amending the existing  indentures to remove  substantially  all of the
restrictive covenants. The Company purchased $459.0 million of public debt under
the tender offer and incurred an extraordinary loss on the early  extinguishment
of debt of  approximately  $42.0  million  (net of income  tax  benefit of $25.7
million).  The 1997  Refinancing Plan was funded by $347.0 million of borrowings
under the Credit  Facility  and the net  proceeds  from the  issuance  of $150.0
million principal amount of senior  subordinated  notes. As a result of the 1997
Refinancing Plan, the Company's total long-term debt increased by $63.9 million.
The 1997 Refinancing Plan was designed to reduce the Company's  interest expense
even after giving effect to the  additional  borrowings.  The  Company's  future
interest expense will vary based on a variety of factors, including fluctuations
in interest rates in general. As a result of the 1997 Refinancing Plan, variable
rate debt comprised a larger  percentage of the Company's  overall  indebtedness
than in the past, and as a result,  future  fluctuations  in interest rates will
have a greater impact on the Company's interest expense than in the past.

       On October 1, 1997, the Company redeemed  approximately  $26.2 million of
the approximately  $30.7 million of the Company's  outstanding  public debt that
was not tendered as part of the 1997 Refinancing  Plan.  These  redemptions were
funded with  borrowings  under the Credit  Facility.  In  connection  with these
redemptions,   the  Company  incurred  an   extraordinary   loss  on  the  early
extinguishment of debt of approximately  $1.3 million (net of income taxes). The
remaining  outstanding  public debt of  approximately  $4.5 million that was not
tendered as part of the 1997  Refinancing Plan was defeased in February 1998 and
redeemed in June 1998.

       On October 6, 1997, the Company sold its  needlepunch  carpeting,  tufted
carpeting and artificial grass products business,  located in Dalton, Georgia to
Bretlin,  Inc., a subsidiary  of The Dixie Group,  Inc. The Company used the net
proceeds  of the  sale  to  reduce  borrowings  under  the  Credit  Facility  by
approximately $38.8 million.

       During  1997  and  1996,  the  Company  repurchased   long-term  debt  of
approximately $42.4 million with the net proceeds from the sale of Perfect Fit.

       During 1997 and 1996,  the Company  purchased  shares of its common stock
for an aggregate  cost of $5.7  million and $6.3  million,  respectively,  under
programs  authorized  by the Board of  Directors  to  purchase up to 3.0 million
shares of the Company's common stock.

                                       26
<PAGE>

Environmental Matters

       The Company is subject to extensive and changing  environmental  laws and
regulations.  Expenditures to date in connection  with the Company's  compliance
with  such  laws and  regulations  did not have a  material  adverse  effect  on
operations,  financial position,  capital expenditures or competitive  position.
The  amount  of  liabilities   recorded  by  the  Company  in  connection   with
environmental  matters as of December 31, 1998 was $4.8 million.  Although it is
possible that new information or future  developments  could require the Company
to  reassess  its  potential  exposure  to all  pending  environmental  matters,
including  those  described  in  the  footnotes  to the  Company's  consolidated
financial  statements,  the  Company  believes  that,  based upon all  currently
available information,  the resolution of all such pending environmental matters
will not have a material adverse effect on the Company's  operations,  financial
position, capital expenditures or competitive position. See "Legal Proceedings -
Environmental Matters."

Inflation and Other Matters

       There was no significant  impact on the Company's  operations as a result
of inflation during the prior three year period;  however, during 1998, 1997 and
1996,  the  Company's  results of  operations  were  adversely  affected  by raw
material  cost  increases.  The  Company  attempts to offset raw  material  cost
increases  through selling price increases;  however,  there can be no assurance
that the Company will be successful in  implementing  selling price increases or
that competitive pricing pressure will not require the Company to adjust selling
prices.  Results of  operations  have been and could be  adversely  affected  by
delays in  implementing,  or the inability of the Company to implement,  selling
price  increases  to offset  raw  material  cost  increases.  For  example,  the
Company's  results of operations in 1998, 1997 and 1996 were adversely  affected
by net  unrecovered  raw  material  costs.  See  "Results of  Operations"  for a
discussion of the impact of raw material price increases. In some circumstances,
market  conditions  or  customer  expectations  may  prevent  the  Company  from
increasing the price of its products to offset the  inflationary  pressures that
may increase its costs in the future.

Year 2000 Compliance

       The  Company  uses  numerous  business  information  systems  as  well as
manufacturing support systems that could be impacted by the "Year 2000 Problem".
The Year 2000 Problem arises from computer  programs that were written using two
digits rather than four to designate the year. In connection  with the Year 2000
Problem, date-sensitive computer software may recognize a date using "00" as the
year 1900 rather  than the year 2000.  This could  result in system  failures or
miscalculations which would cause significant operational disruptions.

       The  Company  has  a  Year  2000  Executive  Sponsor  Team  comprised  of
representatives  of the  Company.  The  Year  2000  Executive  Sponsor  Team  is
providing  direction  to and  receiving  reports  from  the Year  2000  Steering
Committee  (the  "Steering  Committee")  within the  organization.  The Steering
Committee  has  completed  an  assessment  of  the  state  of  readiness  of the
Information   Technology  ("IT")  and  non-IT  systems  of  the  Company.  These
assessments  cover  desktop  computers,   environmental  systems,  manufacturing
systems (including laboratory  information systems) field  instrumentation,  and
significant  third party vendor and supplier  systems,  which  include  employee
compensation and benefit plan  maintenance  systems.  The Steering  Committee is
also in the process of  assessing  the  readiness of the  Company's  significant
customers and suppliers.

       The Year  2000  assessment  process  for  each  facility  consists  of an
inventory  of Year 2000  sensitive  equipment,  an  assessment  of the impact of
possible failures,  determination of required  remediation  actions, if any, and
testing  and  implementation  of these  solutions.  The  inventory,  assessment,
remediation and testing phases were completed at the end of 1998, with fail safe
testing and final implementation currently taking place in 1999. The progress of
these phases as of March 31, 1999 is summarized as follows.

       The Company  completed the inventory and assessment phases of the project
by  December  31,  1998.  These  phases  consisted  of a visit to each  critical
location  by team  members to promote  awareness  of the  project and verify the
initial inventory  provided by the contact at each facility.  Testing plans were
developed which included correspondence with suppliers regarding  date-sensitive
devices.  In  addition,   local  management  was  advised  of  their  roles  and
responsibilities in connection with the Year 2000 Problem.

                                       27

<PAGE>

       The Company  completed the remediation  and testing of critical  business
information  computer  systems as of December 31, 1998.  The completion of these
phases  included the  modification  of several million lines of system code, the
conversion of the systems acquired from Crain to standard  business  information
computer  systems,  upgrading  system  hardware and operating  system  software,
testing  of the  applicable  systems  in a  development  testing  area,  and the
migration of the remediated systems into the production environment.

       The Company  estimates it will spend $2.0 million in connection  with the
Year 2000  Problem.  The  spending  estimate  will be  refined  as phases of the
project  are  completed.  Spending  on the Year 2000  Problem  is funded by cash
generated from operations.

       Management  believes  that  all  significant  systems  controlled  by the
Company  will be Year 2000 ready in the latter half of 1999.  While the Steering
Committee is communicating readiness to third party customers, as requested, and
is assessing the readiness of critical suppliers, there can be no assurance that
third parties with a significant  business  relationship will successfully test,
reprogram,  and replace all of their IT and non-IT systems on a timely basis. As
part of the  overall  response to the Year 2000  Problem,  the Company is in the
process of developing contingency plans in the event of Year 2000 non-compliance
of certain systems or third parties.  Details of such contingency  plans will be
determined  after the Steering  Committee has  completed  its  assessment of its
supply chain, other third parties and the potential for possible failures.

       There is inherent  uncertainty  in connection  with the Year 2000 Problem
due to the  possibility of  unanticipated  failures by third party customers and
suppliers.  Accordingly,  the  Company  is unable,  at this time,  to assess the
extent and resulting materiality of the impact of possible Year 2000 failures on
its  operations,  liquidity or  financial  position.  The Year 2000  assessment,
remediation,  and testing process  continues to provide  information in order to
reduce the level of  uncertainty  regarding the impact of the Year 2000 Problem.
Management believes that if the Company's solutions to the Year 2000 Problem are
completed as scheduled  such  solutions  may help  minimize the  possibility  of
significant disruptions to the Company's operations.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

       An index to the financial statements and the required financial statement
schedules is set forth in Item 14.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE

       Not applicable.

PART III

       The  information  required  by this Part III (Items 10, 11, 12 and 13) is
hereby  incorporated by reference pursuant to Reg. 12b-23 of the Exchange Act to
the Company's  definitive proxy statement which is expected to be filed pursuant
to  Regulation  14A of the  Exchange Act no later than 120 days after the end of
the fiscal year covered by this Annual Report on Form 10-K.


                                       28

<PAGE>

PART IV
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)    Financial statements

            Foamex International Inc. and Subsidiaries: 
              Report of Independent Accountants                            F-2
              Consolidated Balance Sheets as of December 31, 1998
                and December 28, 1997                                      F-3
              Consolidated Statements of Operations for the years
                ended 1998, 1997, and 1996                                 F-5
              Consolidated Statements of Cash Flows for the years
                ended 1998, 1997, and 1996                                 F-6
              Consolidated Statements of Stockholders' Equity
              (Deficit) for the years ended 1998, 1997, and 1996           F-7
              Notes to Consolidated Financial Statements                   F-8
            Foamex International Inc. and Subsidiaries 
            Financial Statement Schedules:
             Schedule I - Condensed Financial Information of Registrant    S-2
             Schedule II - Valuation and Qualifying Account                S-5

(b)    Reports on Form 8-K.

              Form 8-K,  dated  September  2, 1998  announcing  commencement  of
              tender offer for $248.0  million of public debt.  Form 8-K,  dated
              October 16, 1998  reporting  the  termination  of the First Merger
              Agreement.

              Form 8-K,  dated  November 4, 1998  reporting the change in fiscal
              year from  52-53 week to  calendar  year for the  Company,  Foamex
              L.P., and Foamex Capital Corporation.

              Form 8-K,  dated  November  5, 1998  reporting  the signing of the
              Second Merger Agreement.

              Form 8-K, dated January 8, 1999  reporting the  termination of the
              Second Merger Agreement.

              Form 8-K, dated March 11, 1999 reporting  press release  involving
              preliminary  earnings,  appointment  of John G.  Johnson,  Jr. and
              amendments to credit agreements, guarantee and promissory notes.

              Form 8-K,  dated April 20, 1999  reporting  update to  preliminary
              earnings.

(c)      Exhibits

2.1(x)        -  Transfer  Agreement,  dated as of  February  27,  1998,  by and
              between Foam Funding LLC and Foamex L.P.
2.2(x)        - Asset Purchase Agreement,  dated as of February 27, 1998, by and
              among  Foamex  Carpet  Cushion,  Inc.  ("Foamex  Carpet"),  Foamex
              International Inc. ("Foamex International"),  Foam Funding LLC and
              General Felt Industries, Inc. ("General Felt").
2.3(z)        - Agreement  and Plan of Merger,  dated as of November 5, 1998, by
              and among Foamex International, Trace International Holdings, Inc.
              and Trace Merger Sub Corp.
2.4(aa)       - Agreement and Plan of Merger,  dated as of June 25, 1998, by and
              among Trace International  Holdings,  Inc., Trace Merger Sub, Inc.
              and Foamex International Inc.
2.5(z)        - Notice of termination of Agreement and Plan of Merger,  dated as
              of November 5, 1998, from Trace  International  Holdings,  Inc. to
              Foamex International Inc.
3.1(a)        - Certificate of Limited Partnership of Foamex L.P.
3.2.1(a)      - Fourth Amended and Restated Agreement of Limited  Partnership of
              Foamex L.P.,  dated as of December  14,  1993,  by and among FMXI,
              Inc.  ("FMXI") and Trace Foam Company,  Inc.  ("Trace  Foam"),  as
              general partners,  and Foamex International,  as a limited partner
              (the "Partnership Agreement").

                                       29

<PAGE>

3.2.2(b)      - First  Amendment to the  Partnership  Agreement,  dated June 28,
              1994.
3.2.3(c)      - Second  Amendment to the Partnership  Agreement,  dated June 12,
              1997.
3.2.4(v)      - Third Amendment to the Partnership Agreement, dated December 23,
              1997.  3.2.5(x) - Fourth  Amendment to the Partnership  Agreement,
              dated February 27, 1998.
3.3(y)        - Certificate of Incorporation of FMXI.
3.4(y)        - By-laws of FMXI.
3.5(k)        -  Certificate  of  Incorporation  of Foamex  Capital  Corporation
              ("FCC").
3.6(k)        - By-laws of FCC.
3.7.1(a)      - Certificate of Incorporation of Foamex International.
3.7.1         -   Amendment   to   Certificate   of   Incorporation   of  Foamex
              International.
3.7.2(cc)     - Certificate  of  Incorporation  of Foamex Carpet  Cushion,  Inc.
              ("Foamex Carpet")
3.8(a)        - By-laws of Foamex International.
3.8.1(cc)     - By-laws of Foamex Carpet.
4.1.1(d)      - Indenture,  dated as of June 12, 1997, by and among Foamex L.P.,
              FCC,  the  Subsidiary  Guarantors  and The  Bank of New  York,  as
              trustee,  relating  to  $150,000,000  principal  amount  of 9 7/8%
              Senior Subordinated Notes due 2007 (the "9 7/8% Notes"), including
              the form of Senior Subordinated Note and Subsidiary Guarantee.
4.1.2(v)      - First  Supplemental  Indenture,  dated as of December  23, 1997,
              between  Foamex LLC ("FLLC") and The Bank of New York, as trustee,
              relating to the 9 7/8% Notes.
4.1.3(x)      - Second  Supplemental  Indenture,  dated as of February 27, 1998,
              among Foamex L.P. and FCC, as joint and several obligors,  General
              Felt,  Foamex  Fibers,  Inc.  (`Foamex  Fibers"),   and  FLLC,  as
              withdrawing  guarantors,  and The Bank of New  York,  as  trustee,
              relating to the 9 7/8% Notes.
4.1.4(d)      - Registration Rights Agreement, dated as of June 12, 1997, by and
              among Foamex L.P.,  FCC,  General  Felt,  Foamex  Fibers,  and all
              future direct or indirect domestic  subsidiaries of Foamex L.P. or
              FCC,  and  Donaldson,  Lufkin & Jenrette  Securities  Corporation,
              Salomon  Brothers  Inc.  and Scotia  Capital  Markets,  as Initial
              Purchasers.
4.2.1(v)      - Indenture,  dated as of December  23, 1997,  by and among Foamex
              L.P.,  FCC, the Subsidiary  Guarantors,  Crain Holdings  Corp., as
              Intermediate  obligator,  and The Bank of New  York,  as  trustee,
              relating  to  $98,000,000  principal  amount  of  13  1/2%  Senior
              Subordinated  Notes due 2005 (the "13 1/2% Notes"),  including the
              form of Senior Subordinated Note and Subsidiary Guarantee.
4.2.2(x)      - First  Supplemental  Indenture,  dated as of February  27, 1998,
              among Foamex L.P. and FCC, as joint and several obligors,  General
              Felt,  Foamex Fibers and FLLC, as  withdrawing  guarantors,  Crain
              Industries,  Inc., as withdrawing  intermediate  obligor,  and The
              Bank of New York, as trustee, relating to the 13 1/2% Notes.
4.3(x)        - Discharge of  Indenture,  dated as of February 27, 1998,  by and
              among Foamex L.P.,  General Felt,  Foamex  International and State
              Street Bank and Trust Company, as trustee,  relating to the 9 1/2%
              Senior Secured Notes due 2000.
4.4.1(x)      - Credit  Agreement,  dated as of June 12,  1997,  as amended  and
              restated as of February  27, 1998,  by and among Foamex L.P.,  and
              FMXI, the institutions from time to time party thereto as lenders,
              the institutions from time to time party thereto as issuing banks,
              and  Citicorp  USA,   Inc.  and  The  Bank  of  Nova  Scotia,   as
              Administrative Agents.
4.4.1.2(bb)   - Amendment No. 2 to Foamex L.P. Credit Agreement, dated March 11,
              1999.
4.4.2(x)      - Second Amended and Restated Foamex International Guaranty, dated
              as of February 27, 1998, made by Foamex  International in favor of
              Citicorp USA, Inc., as Collateral Agent.
4.4.3(x)      - Amended and Restated Partnership Guaranty,  dated as of February
              27,  1998,  made  by FMXI in  favor  of  Citicorp  USA,  Inc.,  as
              Collateral Agent.
4.4.4(p)      - Foamex Guaranty,  dated as of June 12, 1997, made by Foamex L.P.
              in favor of Citicorp USA,  Inc., as Collateral  Agent.  
4.4.5(p)      - Subsidiary  Guaranty,  dated as of June 12, 1997, made by Foamex
              Latin America,  Inc. in favor of Citicorp USA, Inc., as Collateral
              Agent.
4.4.6(p)      - Subsidiary  Guaranty,  dated as of June 12, 1997, made by Foamex
              Mexico, Inc. in favor of Citicorp USA, Inc., as Collateral Agent.

                                       30

<PAGE>

4.4.7(p)      - Subsidiary  Guaranty,  dated as of June 12, 1997, made by FCC in
              favor of Citicorp  USA,  Inc.,  as  Collateral  Agent.  4.4.8(p) -
              Subsidiary  Guaranty,  dated as of June 12,  1997,  made by Foamex
              Mexico II, Inc.  in favor of Citicorp  USA,  Inc.,  as  Collateral
              Agent.
4.4.9(p)      - Subsidiary  Guaranty,  dated as of June 12, 1997, made by Foamex
              Asia, Inc. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.10(p)     - Subsidiary Pledge Agreement,  dated as of June 12, 1997, made by
              FCC in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.11(p)     - Subsidiary Pledge Agreement,  dated as of June 12, 1997, made by
              Foamex Latin  America,  Inc. in favor of Citicorp  USA,  Inc.,  as
              Collateral Agent.
4.4.12(p)     - Subsidiary Pledge Agreement,  dated as of June 12, 1997, made by
              Foamex Asia,  Inc. in favor of Citicorp  USA,  Inc., as Collateral
              Agent.
4.4.13(p)     - Subsidiary Pledge Agreement,  dated as of June 12, 1997, made by
              Foamex Mexico,  Inc. in favor of Citicorp USA, Inc., as Collateral
              Agent.
4.4.14(p)     - Subsidiary Pledge Agreement,  dated as of June 12, 1997, made by
              Foamex  Mexico  II,  Inc.  in  favor of  Citicorp  USA,  Inc.,  as
              Collateral Agent.
4.4.15(p)     - Foamex  Security  Agreement,  dated as of June 12, 1997, made by
              Foamex L.P. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.16(p)     - Subsidiary Security  Agreement,  dated as of June 12, 1997, made
              by Foamex Latin  America,  Inc. in favor of Citicorp USA, Inc., as
              Collateral Agent.
4.4.17(p)     - Subsidiary Security  Agreement,  dated as of June 12, 1997, made
              by  Foamex  Mexico,  Inc.  in  favor of  Citicorp  USA,  Inc.,  as
              Collateral Agent.
4.4.18(p)     - Subsidiary Security  Agreement,  dated as of June 12, 1997, made
              by Foamex  Mexico II,  Inc.  in favor of Citicorp  USA,  Inc.,  as
              Collateral Agent.
4.4.19(p)     - Subsidiary Security  Agreement,  dated as of June 12, 1997, made
              by Foamex Asia, Inc. in favor of Citicorp USA, Inc., as Collateral
              Agent.
4.4.20(p)     - Subsidiary Security  Agreement,  dated as of June 12, 1997, made
              by FCC in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.21(r)     - Foamex  Pledge  Agreement,  dated as of June 12,  1997,  made by
              Foamex L.P. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.22(w)     - First Amendment to Foamex Pledge Agreement, dated as of December
              23,  1997,  by Foamex  L.P.  in favor of Citicorp  USA,  Inc.,  as
              Collateral Agent.
4.4.23(w)     - First  Amendment  to  Foamex  Security  Agreement,  dated  as of
              December 23, 1997, by Foamex L.P. in favor of Citicorp USA,  Inc.,
              as Collateral Agent.
4.4.24(w)     - First Amendment to Foamex Patent Agreement, dated as of December
              23,  1997,  by Foamex  L.P.  in favor of Citicorp  USA,  Inc.,  as
              Collateral Agent.
4.4.25(w)     - First  Amendment to Trademark  Security  Agreement,  dated as of
              December 23, 1997, by Foamex L.P. in favor of Citicorp USA,  Inc.,
              as Collateral Agent.
4.4.26(w)     -  Acknowledgment  of  Guaranty  by  each of the  guarantors  to a
              Guaranty dated June 12, 1997 in favor of Citicorp USA, Inc.
4.4.27(w)     - First  Amendment to Pledge  Agreement,  dated as of December 23,
              1997, by pledgors in favor of Citicorp USA, Inc.
4.4.28(w)     - Crain Industries  Guaranty,  dated as of December 23, 1997, made
              by Crain in favor of Citicorp USA, Inc.
4.4.29(x)     -  Partnership  Pledge  Agreement,  dated as of February 27, 1998,
              made by Foamex  International  and FMXI in favor of Citicorp  USA,
              Inc., as Collateral Agent.
4.4.30(bb)    -  Amendment  No.  1  to  Second   Amended  and  Restated   Foamex
              International Guaranty, dated March 11, 1999.
4.4.31(bb)    - Amendment No. 1 to Foamex  International  Guaranty,  dated March
              12, 1999.
4.4.32        - Foamex  Patent  Agreement,  dated as of June 12, 1997, by Foamex
              L.P. in favor of Citicorp USA, Inc., as Collateral Agent.
4.4.33        - Trademark  Security  Agreement,  dated as of June 12,  1997,  by
              Foamex L.P. in favor of Citicorp USA, Inc., as Collateral Agent.

                                       31

<PAGE>

4.5(u)        - Commitment  letter,  dated July 17, 1997,  from The Bank of Nova
              Scotia to Foamex Canada Inc.
4.6(a)        - Subordinated  Promissory  Note,  dated as of May 6, 1993, in the
              original principal amount of $7,014,864 executed by Foamex L.P. to
              John Rallis ("Rallis").
4.7(a)        - Marely Loan Commitment Agreement, dated as of December 14, 1993,
              by and between Foamex L.P. and Marely s.a. ("Marely").
4.8(a)        - DLJ Loan Commitment Agreement, dated as of December 14, 1993, by
              and between Foamex L.P. and DLJ Funding, Inc. ("DLJ Funding").
4.9.1(p)      - Promissory Note, dated June 12, 1997, in the aggregate principal
              amount of $5,000,000, executed by Trace Holdings to Foamex L.P.
4.9.2(p)      - Promissory Note, dated June 12, 1997, in the aggregate principal
              amount of $4,794,828, executed by Trace Holdings to Foamex L.P.
4.10.1(x)     - Credit  Agreement,  dated as of February 27, 1998,  by and among
              Foamex Carpet, the institutions from time to time party thereto as
              lenders,  the  institutions  from time to time  party  thereto  as
              issuing  banks and Citicorp USA, Inc. and The Bank of Nova Scotia,
              as administrative agents.
4.10.2(x)     - Foamex  International  Guaranty,  dated as of February 27, 1998,
              made by Foamex  International  in favor of Citicorp USA,  Inc., as
              Collateral Agent.
4.10.3(x)     - Foamex International Pledge Agreement,  dated as of February 27,
              1998, made by Foamex International in favor of Citicorp USA, Inc.,
              as Collateral Agent.
4.10.4(x)     - New GFI Security Agreement,  dated as of February 27, 1998, made
              by Foamex  Carpet in favor of Citicorp  USA,  Inc.,  as Collateral
              Agent.
4.10.5(x)     - New GFI Intercreditor Agreement,  dated as of February 27, 1998,
              by  and  among  Foamex  Carpet,   The  Bank  of  Nova  Scotia,  as
              Administrative  Agent,  and Citicorp USA, Inc., as  Administrative
              Agent and Collateral Agent.
4.10.6(x)     - FII Intercreditor  Agreement,  dated as of February 27, 1998, by
              and between  Foamex  International  and  Citicorp  USA,  Inc.,  as
              Collateral Agent.
4.10.7        - Amendment  No. 1 to Foamex L.P.  Credit  Agreement,  dated as of
              October 30, 1998.
4.10.8(bb)    - Amendment No. 2 to Foamex L.P. Credit Agreement, dated March 12,
              1999.
4.10.9        - Amendment No. 1 to Foamex Carpet Cushion, Inc. Credit Agreement,
              dated October 30, 1998.
4.10.10(bb)   - Amendment No. 2 to Foamex Carpet Cushion, Inc. Credit Agreement,
              dated March 12, 1999.
4.11.1(x)     -  Promissory  Note of Foamex L.P. in favor of Foam Funding LLC in
              the principal amount of $34 million, dated February 27, 1998.
4.12.1(x)     - Promissory Note of Foamex Carpet in favor of Foam Funding LLC in
              the principal amount of $70.2 million, dated February 27, 1998.
4.12.2(bb)    - Amendment to Promissory Note, dated March 15, 1999.
4.13          -Waiver, dated as of April 15, 1999 to the Credit Agreement, dated
              as of February 27, 1998,  among Foamex Carpet  Cushion,  Inc., the
              institutions  party  thereto as Lenders,  the  institutions  party
              thereto as Issuing  Banks,  and Citicorp USA, Inc. and The Bank of
              Nova Scotia as Administrative Agents.
10.1.1(p)     - Amendment to Master Agreement, dated as of June 5, 1997, between
              Citibank, N.A. and Foamex L.P.
10.1.2(p)     -  Amended  Confirmation,  dated  as of  June  13,  1997,  between
              Citibank, N.A. and Foamex L.P.
10.1.3(w)     - Amended  Confirmation,  dated as of  February  2, 1998,  between
              Citibank, N.A. and Foamex L.P.
10.2(h)       -  Reimbursement  Agreement,  dated as of March 23, 1993,  between
              Trace Holdings and General Felt.
10.3(h)       - Shareholder  Agreement,  dated  December 31, 1992,  among,  s.a.
              ("Recticel"),  Recticel Holding Noord B.V.,  Foamex L.P.,  Beamech
              Group  Limited,  LME-Beamech,  Inc.,  James Brian  Blackwell,  and
              Prefoam AG relating to foam technology sharing arrangement.
10.4.1(k)     - Asset Transfer  Agreement,  dated as of October 2, 1990, between
              Trace Holdings and Foamex L.P. (the "Trace Holdings Asset Transfer
              Agreement").
10.4.2(k)     - First  Amendment,  dated as of December 19,  1991,  to the Trace
              Holdings Asset Transfer Agreement.
10.4.3(k)     - Amended and  Restated  Guaranty,  dated as of December 19, 1991,
              made by Trace Foam in favor of Foamex L.P.
10.5.1(k)     - Asset Transfer  Agreement,  dated as of October 2, 1990, between
              Recticel Foam Corporation  ("RFC") and Foamex L.P. (the "RFC Asset
              Transfer Agreement").
10.5.2(k)     - First Amendment, dated as of December 19, 1991, to the RFC Asset
              Transfer  Agreement.  
10.5.3(k)     - Schedule  5.03 to the RFC Asset  Transfer  Agreement  (the "5.03
              Protocol").

                                       32

<PAGE>

10.5.4(h)     - The 5.03 Protocol Assumption Agreement,  dated as of October 13,
              1992,  between  RFC and Foamex L.P.  10.5.5(h) - Letter  Agreement
              between  Trace  Holdings  and  Recticel   regarding  the  Recticel
              Guaranty, dated as of July 22, 1992.
10.6(l)       - Supply Agreement,  dated June 28, 1994,  between Foamex L.P. and
              Foamex International.
10.7.1(l)     - First  Amended and Restated Tax Sharing  Agreement,  dated as of
              December 14, 1993,  among Foamex L.P., Trace Foam, FMXI and Foamex
              International.
10.7.2(d)     - First  Amendment  to First  Amended  and  Restated  Tax  Sharing
              Agreement,  dated as of June 12,  1997,  by and among Foamex L.P.,
              Foamex International, FMXI and Trace Foam.
10.7.3(w)     - Second  Amendment  to First  Amended  and  Restated  Tax Sharing
              Agreement,  dated as of December  23,  1997,  by and among  Foamex
              L.P., Foamex International, FMXI, and Trace Foam.
10.7.4(y)     - Third  Amendment  to First  Amended  and  Restated  Tax  Sharing
              Agreement,  dated as of February 27, 1998,  by and between  Foamex
              L.P., Foamex International and FMXI.
10.8.1(m)     - Tax  Distribution  Advance  Agreement,  dated as of December 11,
              1996, by and between Foamex L.P. and Foamex-JPS Automotive.
10.8.2(d)     - Amendment No. 1 to Tax Distribution Advance Agreement,  dated as
              of  June  12,  1997,  by  and  between   Foamex  L.P.  and  Foamex
              International.
10.9.1(h)     - Trace Foam  Management  Agreement  between Foamex L.P. and Trace
              Foam, dated as of October 13, 1992.
10.9.2(l)     - Affirmation  Agreement  re:  Management  Agreement,  dated as of
              December 14, 1993, between Foamex L.P. and Trace Foam.
10.9.3(d)     - First  Amendment to Management  Agreement,  dated as of June 12,
              1997, by and between Foamex L.P. and Trace Foam.
10.10.1(k)    - Salaried Incentive Plan of Foamex L.P. and Subsidiaries.
10.10.2(k)    - Trace Holdings 1987 Nonqualified Stock Option Plan.
10.10.3(k)    - Equity Growth Participation Program.
10.10.4(o)    - The Foamex L.P. Salaried Pension Plan (formerly the General Felt
              Industries,   Inc.   Retirement  Plan  for  Salaried   Employees),
              effective as of January 1, 1995.
10.10.5(u)    - The Foamex  L.P.  Hourly  Pension  Plan  (formerly  "The  Foamex
              Products  Inc.  Hourly  Employee   Retirement  Plan),  as  amended
              December 31, 1995.
10.10.6(u)    - Foamex L.P. 401(k) Savings Plan effective October 1, 1997.
10.10.7(a)    - Foamex L.P.'s 1993 Stock Option Plan.
10.10.8(a)    - Foamex L.P.'s Non-Employee Director Compensation Plan.
10.11.1(o)    -  Employment  Agreement,  dated as of  February  1, 1994,  by and
              between Foamex L.P. and William H. Bundy.
10.11.2       - Employment Agreement, dated as of March 16, 1999, by and between
              Foamex International and John G. Johnson, Jr.
10.12.1(a)    - Warrant  Exchange  Agreement,  dated as of December 14, 1993, by
              and between Foamex L.P. and Marely.
10.12.2(a)    - Warrant  Exchange  Agreement,  dated as of December 14, 1993, by
              and between Foamex L.P. and DLJ Funding.
10.13(t)      - Warrant  Agreement,  dated as of June 28,  1994,  by and between
              Foamex International and Shawmut Bank.
10.14(o)      - Stock Purchase Agreement,  dated as of December 23, 1993, by and
              between   Transformacion   de  Espumas  u  Fieltros,   S.A.,   the
              stockholders which are parties thereto, and Foamex L.P.
10.15.1(r)    - Asset  Purchase  Agreement,  dated as of August 29, 1997, by and
              among  General  Felt,  Foamex  L.P.,  Bretlin,  Inc. and The Dixie
              Group.
10.15.2(s)    - Addendum  to Asset  Purchase  Agreement,  dated as of October 1,
              1997, by and among General Felt,  Foamex L.P.,  Bretlin,  Inc. and
              The Dixie Group.
10.16.1(x)    - Supply Agreement,  dated as of February 27, 1998, by and between
              Foamex L.P. and General Felt (as assigned to Foamex Carpet).
10.16.2(x)    -  Administrative  Services  Agreement,  dated as of February  27,
              1998, by and between  Foamex L.P. and General Felt (as assigned to
              Foamex Carpet).

                                       33

<PAGE>

10.17(y)      - Tax Sharing  Agreement,  dated as of February 27, 1998,  between
              Foamex International and Foamex Carpet.
10.18.1(w)    - Joint  Venture  Agreement  between Hua Kee  Company  Limited and
              Foamex Asia, Inc., dated as of July 8, 1997.
10.18.2(w)    - Loan Agreement  between Hua Kee Company Limited and Foamex Asia,
              Inc., dated as of July 8, 1997.
27            - Financial Data Schedule for the year ended December 31, 1998.
----------------------------

(a)    Incorporated  herein  by  reference  to  the  Exhibit  to  Foamex  L.P.'s
       Registration Statement on Form S-1, Registration No. 33-69606.

(b)    Incorporated  herein  by  reference  to the  Exhibit  to the Form 10-K of
       Foamex International for the fiscal year ended January 1, 1995.

(c)    Incorporated  herein by reference to the Exhibit to the Current Report on
       Form 8-K of Foamex International reporting an event that occurred May 28,
       1997.

(d)    Incorporated  herein by reference to the Exhibit to the Current Report on
       Form 8-K of Foamex  International  reporting an event that  occurred June
       12, 1997.

(e)    Incorporated  herein by  reference  to the  Exhibit  to the  Registration
       Statement of Foamex L.P. and FCC on Form S-4, Registration No. 33-65158.

(f)    Incorporated  herein  by  reference  to the  Exhibit  to the Form 10-Q of
       Foamex International for the quarterly period ended June 30, 1996.

(g)    Incorporated  herein by  reference  to the  Exhibit  to the  Registration
       Statement of Foamex L.P., FCC and General Felt on Form S-1,  Registration
       Nos. 33-60888, 33-60888-01, and 33-60888-02.

(h)    Incorporated  herein  by  reference  to  the  Exhibit  to the  Form  10-K
       Statement of Foamex L.P. and FCC for fiscal 1992.

(i)    Incorporated  herein  by  reference  to the  Exhibit  to the Form 10-K of
       Foamex L.P. for fiscal 1994.

(j)    Incorporated  herein  by  reference  to the  Exhibit  to the Form 10-Q of
       Foamex for the quarterly period ended September 30, 1996.

(k)    Incorporated  herein by  reference  to the  Exhibit  to the  Registration
       Statement of Foamex L.P. and FCC on Form S-1,  Registration Nos. 33-49976
       and 33-49976-01.

(l)    Incorporated  herein by  reference  to the  Exhibit  to the  Registration
       Statement  of FJPS,  FJCC and Foamex L.P. on Form S-4,  Registration  No.
       33-82028.

(m)    Incorporated  herein by reference to the Exhibit to the Annual  Report on
       Form 10-K of Foamex  International for the fiscal year ended December 29,
       1996.

(n)    Incorporated  herein  by  reference  to the  Exhibit  to the Form 10-Q of
       Foamex International for the quarterly period ended July 2, 1995.

(o)    Incorporated  herein  by  reference  to the  Exhibit  to the Form 10-K of
       Foamex L.P. for fiscal 1993.

(p)    Incorporated  herein by  reference  to the  Exhibit  in the  Registration
       Statement  of  Foamex   International  on  Form  S-4,   Registration  No.
       333-30291.

                                       34
<PAGE>

(q)    Incorporated  herein  by  reference  to the  Exhibit  to the Form 10-K of
       Foamex L.P. for the fiscal year ended December 31, 1995.

(r)    Incorporated  herein by  reference  to the Current  Report on Form 8-K of
       Foamex L.P. reporting an event that occurred on August 29, 1997.

(s)    Incorporated  herein by  reference  to the Current  Report on Form 8-K of
       Foamex L.P. reporting an event that occurred on October 6, 1997.

(t)    Incorporated  by  reference  to the  Exhibit  to the Form  10-Q of Foamex
       International for the quarterly period ended July 3, 1994.

(u)    Incorporated  by reference to the Exhibit to the Form 10-Q of Foamex L.P.
       for the quarterly period ended September 28, 1997.

(v)    Incorporated  herein by reference to the Exhibit to the Current Report on
       Form  8-K  of  Foamex  L.P.,   Foamex  Capital   Corporation  and  Foamex
       International reporting an event that occurred December 23, 1997.

(w)    Incorporated  herein by  reference  to the  Exhibit  in the  Registration
       Statement of Foamex L.P. and FCC on Form S-4, Registration No. 333-45733,
       filed February 6, 1998.

(x)    Incorporated  herein by  reference  to the Current  Report on Form 8-K of
       Foamex  International  reporting  an event that  occurred on February 27,
       1998.

(y)    Incorporated  herein  by  reference  to the  Exhibit  to the Form 10-K of
       Foamex International for the fiscal year ended December 28, 1997.

(z)    Incorporated  herein by  reference  to the Current  Report on Form 8-K of
       Foamex  International  reporting  an event that  occurred  on November 5,
       1998.

(aa)   Incorporated  herein by reference to the Exhibit to the Current Report on
       Form 8-K of Foamex International reporting an event that occurred on June
       25, 1998.

(bb)   Incorporated  herein by reference to the Exhibit to the Current Report on
       Form 8-K of Foamex  International  reporting  an event that  occurred  on
       March 11, 1999.

(cc)   Incorporated  herein by  reference  to the  Exhibit  in the  Registration
       Statement  of  Foamex  L.P.  and  FCC on  Form  S-4/A,  Registration  No.
       333-45733, filed May 11, 1998.

       Certain  instruments  defining  the rights of security  holders have been
excluded herefrom in accordance with Item  601(b)(4)(iii) of Regulation S-K. The
registrant  hereby  agrees  to  furnish  a copy of any  such  instrument  to the
Commission upon request.


                                       35
<PAGE>
                                   SIGNATURES

            Pursuant  to  the  requirements  of  Section  13 of  the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto  duly  authorized  on the 23rd day of
April 1999.

                                    FOAMEX INTERNATIONAL INC.


                                    By: /s/ John G. Johnson, Jr.     
                                    Name:  John G. Johnson, Jr.
                                    Title: President and Chief Executive Officer

            Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following  persons on its behalf by the
registrant and in the capacities and on the dates indicated:

Signature                           Title                             Date


/s/ Marshall S. Cogan            Chairman of the Board            April 23, 1999
------------------------
     Marshall S. Cogan


/s/ Robert J. Hay                Chairman Emeritus                April 23, 1999
---------------------------      and Director
     Robert J. Hay         


/s/ John G. Johnson, Jr.         President, Chief Executive       April 23, 1999
------------------------         Officer and Director
    John G. Johnson, Jr. 


/s/ John A. Feenan               Executive Vice President         April 23, 1999
-------------------------        and Chief Financial Officer
    John A. Feenan        


/s/ Etienne Davignon             Director                         April 23, 1999
-------------------------        
    Etienne Davignon


/s/ John H. Gutfreund            Director                         April 23, 1999
--------------------------
    John H. Gutfreund


/s/ Stuart J. Hershon            Director                         April 23, 1999
--------------------------
    Stuart J. Hershon


/s/ John V. Tunney               Director                         April 23, 1999
-------------------------
    John V. Tunney


                                       36

<PAGE>

                            FOAMEX INTERNATIONAL INC.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


       Foamex International Inc.

            Index to Consolidated Financial Statements                      F-1

            Report of Independent Accountants                               F-2

            Consolidated Balance Sheets as of December 31, 1998 
                 and December 28, 1997                                      F-3

            Consolidated Statements of Operations for the years 
                 ended 1998, 1997, and 1996                                 F-5

            Consolidated Statements of Cash Flows for the years 
                 ended 1998, 1997, and 1996                                 F-6

            Consolidated Statements of Stockholders' Equity 
                 (Deficit) for the years ended 1998, 1997, and 1996         F-7

            Notes to Consolidated Financial Statements                      F-8


                                      F-1
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholders
of Foamex International Inc.:

In our opinion,  the  accompanying  consolidated  balance sheets and the related
consolidated statements of operations,  of stockholders' equity (deficit) and of
cash flows present fairly, in all material  respects,  the financial position of
Foamex  International  Inc. and its subsidiaries (the "Company") at December 31,
1998 and December 28, 1997,  and the results of their  operations and their cash
flows for each of the three years in the period  ended  December  31,  1998,  in
conformity with generally accepted accounting  principles.  In addition,  in our
opinion, the financial statement schedules as of and for each of the three years
in the period ended  December 31, 1998 when  considered in relation to the basic
consolidated  financial  statements  taken as a whole,  present  fairly,  in all
material  respects,  the  information  required  to be included  therein.  These
financial statements and financial statement schedules 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 of these
statements  in accordance  with  generally  accepted  auditing  standards  which
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,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for the opinion expressed above.

The selected  quarterly  financial data in Note 22 contains  information that we
did not audit, and,  accordingly,  we do not express an opinion on that data. We
attempted  but were  unable to review  the  quarterly  data in  accordance  with
standards  established by the American Institute of Certified Public Accountants
because we believe that the Company's  internal  control for the  preparation of
interim financial information does not provide an adequate basis to enable us to
complete such a review.

The accompanying  financial  statements have been prepared  assuming the Company
will  continue as a going  concern.  As discussed in Note 1 to the  accompanying
financial  statements,  during  1998 the  Company  had a  significant  loss from
continuing  operations,  net cash  used by  operating  activities  and a working
capital deficit since it violated certain debt covenants for which it is seeking
amendments;  however,  there can be no assurance  that such  amendments  will be
obtained  and  therefore  substantially  all  long-term  debt is  classified  as
current.  These matters raise  substantial  doubt about the Company's ability to
continue as a going concern. In addition, the Company has been informed by Trace
International  Holdings,  Inc. ("Trace"),  the Company's principal  stockholder,
that  Trace  has  substantial  debt  obligations  and  that it may not  have the
financial resources to pay these obligations when due within the near future. As
a result,  Trace  creditors  could  foreclose or otherwise  attach the Company's
stock.  Such an event may result in the acceleration of substantially all of the
Company's debt.  Management's  plans in regard to these matters are described in
Note 1 to the accompanying financial statements. The financial statements do not
include  any   adjustments   that  might   result  from  the  outcome  of  these
uncertainties.


PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania
April 22, 1999

                                      F-2
<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                         December 31,       December 28,
ASSETS                                                       1998               1997      
                                                         -----------        -----------
                                                                   (thousands)
<S>                                                       <C>               <C>      
CURRENT ASSETS:
    Cash and cash equivalents                             $  12,572         $  12,044
    Accounts receivable, net of allowance for
      doubtful accounts of $11,630 and $8,082               185,158           175,684
    Inventories                                             136,658           120,299
    Deferred income taxes                                        --            22,853
    Due from related parties                                     --             1,755
    Other current assets                                     38,978            38,293
                                                          ---------         ---------

            Total current assets                            373,366           370,928
                                                          ---------         ---------

PROPERTY, PLANT AND EQUIPMENT:
    Land and land improvements                                7,142             9,054
    Buildings and leasehold improvements                     98,670            79,876
    Machinery, equipment and furnishings                    256,061           234,229
    Construction in progress                                 25,000            23,331
                                                          ---------         ---------

            Total                                           386,873           346,490

    Less accumulated depreciation and amortization         (144,700)         (113,055)
                                                          ---------         ---------

       Property, plant and equipment, net                   242,173           233,435

COST IN EXCESS OF ASSETS ACQUIRED, NET                      220,934           218,219

DEBT ISSUANCE COSTS, NET                                     14,852            18,889

DEFERRED INCOME TAXES                                            --            26,960

OTHER ASSETS                                                 23,640            25,192
                                                          ---------         ---------

TOTAL ASSETS                                              $ 874,965         $ 893,623
                                                          =========         =========
</TABLE>


               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                      F-3
<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                        December 31,        December 28,
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                              1998                1997       
                                                                        -----------         -----------
                                                                         (thousands except share data)
<S>                                                                     <C>                 <C>        
CURRENT LIABILITIES:
    Short-term borrowings                                               $     2,957         $     6,598
    Current portion of long-term debt                                       690,248              12,931
    Current portion of long-term debt - related party                        98,935                  --
    Accounts payable                                                        149,268             131,689
    Accrued employee compensation                                             7,643              10,827
    Accrued interest                                                          7,851              10,716
    Accrued restructuring and plant consolidation                             2,947              15,644
    Deferred income taxes                                                     2,074                  --
    Other accrued liabilities                                                66,514              44,042
                                                                        -----------         -----------

      Total current liabilities                                           1,028,437             232,447

LONG-TERM DEBT                                                                8,240             735,724

DEFERRED INCOME TAXES                                                           991               2,529

ACCRUED RESTRUCTURING AND
    PLANT CONSOLIDATION                                                       9,003              11,252

OTHER LIABILITIES                                                            32,413              25,090
                                                                        -----------         -----------

    Total liabilities                                                     1,079,084           1,007,042
                                                                        -----------         -----------

COMMITMENTS AND CONTINGENCIES                                                    --                  --
                                                                        -----------         -----------

STOCKHOLDERS' EQUITY (DEFICIT):
    Preferred Stock, par value $1.00 per share:
      Authorized 5,000,000 shares - none issued                                  --                  --
    Common Stock, par value $.01 per share:
      Authorized 50,000,000 shares
      Issued 27,005,752 and 26,908,680 shares, respectively;
      Outstanding 25,016,752 and 24,919,680 shares, respectively                270                 269
    Additional paid-in capital                                               86,990              86,025
    Retained earnings (accumulated deficit)                                (237,661)           (164,118)
    Accumulated other comprehensive income (loss)                           (24,721)             (6,598)
    Other:
      Common Stock held in treasury, at cost:
        1,989,000 shares                                                    (19,202)            (19,202)
      Shareholder note receivable                                            (9,795)             (9,795)
                                                                        -----------         -----------

      Total stockholders' equity (deficit)                                 (204,119)           (113,419)
                                                                        -----------         -----------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                    $   874,965         $   893,623
                                                                        ===========         ===========
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                      F-4
<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                       For the Years 1998, 1997, and 1996

<TABLE>
<CAPTION>
                                                     1998             1997             1996    
                                                     ----             ----             ----    
                                                      (thousands except per share amounts)
<S>                                              <C>              <C>              <C>        
NET SALES                                        $ 1,246,396      $   931,095      $   926,351

COST OF GOODS SOLD                                 1,091,891          787,756          773,119
                                                 -----------      -----------      -----------

GROSS PROFIT                                         154,505          143,339          153,232

SELLING, GENERAL AND ADMINISTRATIVE
    EXPENSES                                          89,171           67,139           58,329

RESTRUCTURING AND OTHER CHARGES (CREDITS)             (9,698)          21,100           (6,541)
                                                 -----------      -----------      -----------

INCOME FROM OPERATIONS                                75,032           55,100          101,444

INTEREST AND DEBT ISSUANCE EXPENSE                    72,295           50,570           53,900

OTHER INCOME (EXPENSE), NET                          (14,348)           2,126            1,617
                                                 -----------      -----------      -----------

INCOME (LOSS) FROM CONTINUING OPERATIONS
    BEFORE PROVISION (BENEFIT) FOR
    INCOME TAXES                                     (11,611)           6,656           49,161

PROVISION FOR INCOME TAXES                            58,242            2,525           16,669
                                                 -----------      -----------      -----------

INCOME (LOSS) FROM CONTINUING OPERATIONS             (69,853)           4,131           32,492
                                                 -----------      -----------      -----------

DISCONTINUED OPERATIONS:

LOSS FROM DISCONTINUED OPERATIONS,
    NET OF INCOME TAXES                                   --           (1,994)            (584)

LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS,
    INCLUDING PROVISION FOR OPERATING LOSSES
    DURING THE PHASE-OUT PERIOD, NET OF
    INCOME TAXES                                          --               --         (113,896)
                                                 -----------      -----------      -----------

LOSS FROM DISCONTINUED OPERATIONS,
    NET OF INCOME TAXES                                   --           (1,994)        (114,480)
                                                 -----------      -----------      -----------

INCOME (LOSS) BEFORE EXTRAORDINARY LOSS              (69,853)           2,137          (81,988)

EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT
    OF DEBT, NET OF INCOME TAXES                      (1,917)         (44,482)          (1,147)
                                                 -----------      -----------      -----------

NET INCOME (LOSS)                                $   (71,770)     $   (42,345)     $   (83,135)
                                                 ===========      ===========      ===========

BASIC EARNINGS (LOSS) PER SHARE:
   CONTINUING OPERATIONS                         $     (2.79)     $      0.16      $      1.28
                                                 ===========      ===========      ===========
   NET EARNINGS (LOSS) PER SHARE                 $     (2.87)     $     (1.68)     $     (3.28)
                                                 ===========      ===========      ===========

DILUTED EARNINGS (LOSS) PER SHARE:
   CONTINUING OPERATIONS                         $     (2.79)     $      0.16      $      1.26
                                                 ===========      ===========      ===========
   NET EARNINGS (LOSS) PER SHARE                 $     (2.87)     $     (1.65)     $     (3.23)
                                                 ===========      ===========      ===========
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                      F-5
<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                       For the Years 1998, 1997, and 1996

<TABLE>
<CAPTION>
                                                                        1998           1997          1996    
                                                                     ---------      ---------      ---------
OPERATING ACTIVITIES:                                                              (thousands)
<S>                                                                  <C>            <C>            <C>       
   Net income (loss)                                                 $ (71,770)     $ (42,345)     $ (83,135)
   Adjustments to reconcile  net income (loss) to net
     cash provided by operating activities:
     Depreciation and amortization                                      35,385         22,047         22,353
     Amortization of debt issuance costs, debt premium, deferred
        swap adjustment and gain, and debt discount                       (100)         7,783         13,903
     Net loss on disposal of discontinued operations                        --          1,994        110,137
     Net loss (income) from discontinued operations                         --             --          4,343
     Asset writedowns and other charges (credits)                       (7,972)        12,041         (7,364)
     Provision for uncollectible accounts                                2,611          2,295            704
     Deferred income taxes                                              54,178         (1,179)        14,903
     Other, net                                                         (4,056)        (5,195)        (3,642)
   Changes in operating assets and liabilities,
     net of acquisitions and discontinued operations:
     Accounts receivable                                               (12,085)        (4,037)       (13,723)
     Inventories                                                       (20,809)        12,882        (11,688)
     Accounts payable                                                   17,579         12,733          4,306
     Accrued restructuring and plant consolidation charges             (14,946)         5,701         (7,405)
     Other assets and liabilities                                        8,059        (24,342)        (2,438)
                                                                     ---------      ---------      ---------

        Net cash provided by (used for) continuing operations          (13,926)           378         41,254
        Net cash provided by discontinued operations                        --             --         16,491
                                                                     ---------      ---------      ---------
        Net cash provided by (used for) operating activities           (13,926)           378         57,745
                                                                     ---------      ---------      ---------

INVESTING ACTIVITIES:
   Capital expenditures                                                (33,701)       (33,537)       (23,344)
   Acquisitions, net of cash acquired                                       --       (119,065)          (841)
   Proceeds from sale (settlement) of discontinued operations               --        (13,556)        59,452
   Proceeds from sale of assets                                          2,230         40,169             --
   Purchase of note from related party                                      --         (5,000)            --
   Decrease (increase) in restricted cash                                   --         12,143        (12,143)
   Discontinued operations investing activities                             --             --         (5,490)
   Other investing activities                                           (1,290)        (1,888)        (1,276)
                                                                     ---------      ---------      ---------

        Net cash provided by (used for) investing activities           (32,761)      (120,734)        16,358
                                                                     ---------      ---------      ---------

FINANCING ACTIVITIES:
   Net proceeds from (repayments of) short-term borrowings              (3,641)         2,894          1,493
   Net proceeds from (repayments of) revolving loans                    84,511         54,928             --
   Proceeds from long-term debt                                        138,810        594,499          1,500
   Cash overdraft                                                        7,300             --             --
   Repayments of long-term debt                                       (143,047)      (517,549)       (38,887)
   Repayments of long-term debt-related parties                         (5,265)            --             --
   Debt issuance costs                                                  (2,029)       (18,410)            --
   GFI transaction costs                                                (5,229)            --             --
   GFI transaction payments of accounts payable                         (4,800)            --             --
   GFI transaction purchase of assets                                  (20,000)            --             --
   Purchase of treasury stock                                               --         (5,739)        (6,296)
   Payment of dividends                                                 (1,245)            --             --
   Discontinued operations financing activities                             --             --        (12,406)
   Other financing activities                                            1,850           (426)          (626)
                                                                     ---------      ---------      ---------

        Net cash provided by (used for) financing activities            47,215        110,197        (55,222)
                                                                     ---------      ---------      ---------

Net increase (decrease) in cash and cash equivalents                       528        (10,159)        18,881

Cash and cash equivalents at beginning of period                        12,044         22,203          3,322
                                                                     ---------      ---------      ---------

Cash and cash equivalents at end of period                           $  12,572      $  12,044      $  22,203
                                                                     =========      =========      =========
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                      F-6
<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                       For the Years 1998, 1997, and 1996

<TABLE>
<CAPTION>
                                                                                Accumulated
                                                                     Retained      Other  
                                                        Additional   Earnings     Compre-
                                         Common Stock    Paid-in  (Accumulated    hensive
                                        Shares  Amount   Capital     Deficit)   Income (Loss)   Other       Total
                                        ------  ------   -------     --------   -------------   -----       -----
                                                                   (thousands)

<S>                                     <C>     <C>     <C>         <C>           <C>         <C>        <C>     
Balances at December 31, 1995            26,716  $267    $84,015     $(37,039)     $(6,320)    $(11,540)  $ 29,383

Net loss                                                              (83,135)                             (83,135)
Additional pension liability                                                         1,427                   1,427
Foreign currency translation adjustment                                                (46)                    (46)
                                                                                                         ---------
  Comprehensive income (loss)                                                                              (81,754)
Issuance of common stock                     22     -        165                                               165
Stock option compensation                                    297                                               297
Stock options exercised                      15     -        102                                               102
Purchase of treasury stock                                                                       (6,296)    (6,296)
                                         ------  ----    -------    ---------     --------     --------  --------- 
Balances at December 29, 1996            26,753   267     84,579     (120,174)      (4,939)     (17,836)   (58,103)

Net loss                                                              (42,345)                             (42,345)
Additional pension liability                                                          (786)                   (786)
Foreign currency translation adjustment                                               (873)                   (873)
                                                                                                         ---------
  Comprehensive income (loss)                                                                              (44,004)
Issuance of common stock                     10     -        161                                               161
Stock option compensation                                    282                                               282
Stock options exercised                     145     2      1,003                                             1,005
Purchase of treasury stock                                                                       (5,739)    (5,739)
Increase in note receivable from
    principal stockholder                                                                        (5,422)    (5,422)
Distribution to principal stockholder                                  (1,599)                              (1,599)
                                         ------  ----    -------    ---------     --------     --------  --------- 
Balances at December 28, 1997            26,908   269     86,025     (164,118)      (6,598)     (28,997)  (113,419)

Net loss                                                              (71,770)                             (71,770)
Additional pension liability                                                       (11,525)                (11,525)
Foreign currency translation adjustment                                             (6,598)                 (6,598)
                                                                                                         ---------
  Comprehensive income (loss)                                                                              (89,893)
Issuance of common stock                     15              163                                               163
Stock option compensation                                    208                                               208
Stock options exercised                      83     1        594                                               595
Cash dividend                                                          (1,245)                              (1,245)
Other                                                                    (528)                                (528)
                                         ------  ----    -------    ---------     --------     --------  --------- 

Balances at December 31, 1998            27,006  $270    $86,990    $(237,661)    $(24,721)    $(28,997) $(204,119)
                                         ======  ====    =======    =========     ========     ========  ========= 
</TABLE>

               The accompanying notes are an integral part of the
                       consolidated financial statements.

                                      F-7
<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     ORGANIZATION AND BASIS OF PRESENTATION

       Foamex  International  Inc.  (the  "Company")  operates  in the  flexible
polyurethane  and advanced  polymer foam products  industry.  As of December 31,
1998,  the  Company's   operations  are  conducted   through  its  wholly  owned
subsidiaries,  Foamex L.P. and Foamex Carpet Cushion, Inc. ("Foamex Carpet") and
consist of the following  operating  segments:  (i) foam  products,  (ii) carpet
cushion products,  (iii) automotive  products,  (iv) technical  products and (v)
other,  which primarily  consists of certain foreign  manufacturing  operations,
corporate   expenses  not  allocated  to  the  other   operating   segments  and
restructuring and other charges. The net sales and income (loss) from operations
of these  operating  segments  for each of the last three years are  included in
Note 16.

       The  accompanying  financial  statements have been prepared  assuming the
Company will continue as a going concern.  For the year ended December 31, 1998,
the Company had a loss from continuing operations, a working capital deficit and
was not in  compliance  with  certain  debt  covenants  for which it is  seeking
amendments.  Such  non-compliance  provides the lenders under those  agreements,
which have an aggregate  outstanding  principal amount of  approximately  $480.4
million,  with the right,  upon  notice and lapse of time to declare all of such
indebtedness  to be due. To date the lenders have not  executed  such rights and
have  granted  the  Company a waiver of such  covenants  through  May 5, 1999 to
enable the Company to negotiate an amendment of such covenants;  there can be no
assurance that such amendments will be obtained and therefore such  indebtedness
has been classified as current in the Company's financial  statements.  Were the
lenders under those agreements to accelerate the maturity of their indebtedness,
such acceleration  would constitute an event of default and substantially all of
the  Company's   long-term  debt.   Therefore,   the  Company  has  reclassified
approximately  $771.1 million of long-term debt as current.  Such classification
raises  substantial  concern about the Company's  ability to continue as a going
concern.  In  addition,  the  Company has been  informed by Trace  International
Holdings,  Inc.  ("Trace") that Trace had substantial debt obligations that were
due at the end of December 1998 and did not have the financial  resources to pay
those obligations.  Subsequently, Trace informed the Company that waivers and/or
modifications  of such  indebtedness  had been  obtained  for at least  the near
future;   however,   there  can  be  no  assurance   that  such  waivers  and/or
modifications  will remain in effect prior to obtaining a permanent  resolution.
If Trace were to default on its  indebtedness  secured by the  Company's  common
stock or other Trace  creditors were to take steps  constituting a default under
such indebtedness (such as filing an involuntary  bankruptcy  petition),  and if
the holders of such secured  indebtedness  were to  foreclose  on the  Company's
common stock held by Trace,  such event could trigger the  acceleration  and put
rights of  substantially  all of the debt of the  Company  as  described  below.
Although  management believes that all such debt obligations would be refinanced
under such  circumstances,  there can be no  assurance  that the  Company or its
subsidiaries  would  be  able  to do so.  As a  result,  Trace  creditors  could
foreclose or otherwise attach the Company's  stock.  Such an event may result in
the  acceleration  of  substantially  all of the Company's  debt.  The financial
statements  do not include any further  adjustments  that might  result from the
outcome of these uncertainties.

       Certain credit  agreements and promissory notes of Foamex L.P. and Foamex
Carpet  pursuant to which  approximately  $505.2 million of debt has been issued
contain provisions that would result in the acceleration of such indebtedness if
Trace were to cease to own at least 30% of the  outstanding  common stock of the
Company.  Similarly,  certain  indentures  of Foamex  L.P.  and  Foamex  Capital
Corporation  relating to  approximately  $248.0  million of senior  subordinated
notes contain  provisions  that provide the holders of such senior  subordinated
notes with the right to require the issuers  thereof to  repurchase  such senior
subordinated  notes at a price in cash equal to 101% of the aggregate  principal
amount thereof,  plus accrued and unpaid interest thereon,  if Trace falls below
certain  specified  ownership  levels of common stock and other persons or group
owns a greater percentage of common stock than Trace.

       On March 16,  1998,  the Company  announced  that its Board of  Directors
received an  unsolicited  buyout  proposal from Trace,  the Company's  principal
stockholder.  Trace proposed to acquire all of the  outstanding  common stock of
the Company not owned by Trace and its subsidiaries  (the "Public Shares") for a
cash price of $17.00 per share. As of March 16, 1998, Trace and its subsidiaries
beneficially owned  approximately  11,475,000 shares or approximately 46% of the
outstanding  common  stock of the  Company.  In response to Trace's  offer,  the
Company's  Board of Directors  appointed a special  committee  to determine  the
advisability  and fairness of the proposed buyout to the Company's  stockholders
other than Trace and its subsidiaries.

                                      F-8
<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     ORGANIZATION AND BASIS OF PRESENTATION (continued)

       On June 25,  1998,  Trace,  Trace  Merger Sub,  Inc.  ("Merger  Sub"),  a
Delaware  corporation  and wholly  owned  subsidiary  of Trace,  and the Company
entered into an  Agreement  and Plan of Merger (the "First  Merger  Agreement").
Pursuant to the terms of the First Merger Agreement,  Merger Sub would have been
merged with and into the Company  (the "First  Merger") and each share of common
stock,  other than  common  stock held by Trace and its  subsidiaries,  treasury
shares,  and common stock with respect to which appraisal rights would have been
perfected,  would have been converted into the right to receive $18.75 per share
in cash.  On November 5, 1998,  Trace  terminated  the First  Merger  Agreement,
pursuant  to its  terms,  due to the  failure of  certain  financing  conditions
contained in the First Merger Agreement.

       On November 5, 1998,  Trace,  Merger Sub and the Company  entered  into a
second Agreement and Plan of Merger (the "Second Merger Agreement"). Pursuant to
the terms of the Second Merger Agreement, Merger Sub would have been merged with
and into the Company (the "Second Merger") and each outstanding  share of common
stock,  other than  common  stock held by Trace and its  subsidiaries,  treasury
shares,  and common stock with respect to which appraisal rights would have been
perfected,  would have been converted into the right to receive $12.00 per share
in cash.  Trace  delivered a letter to the Company,  dated  January 8, 1999 (the
"Notice of Termination"),  terminating the Second Merger Agreement,  pursuant to
its terms, due to the failure of certain financing conditions.

       In  connection  with the First  Merger  Agreement  and the Second  Merger
Agreement,  the  Company  retained  and paid for legal  counsel  to the  special
committee,  a financial advisor to the special  committee,  legal counsel to the
Board of  Directors  and a  financial  advisor  to the  Board of  Directors.  In
addition, the Company commenced,  but did not close, a debt tender offer, a debt
exchange offer, an internal  corporate  restructuring  and refinancing,  and the
offer of three different issues of high-yield notes.

       On February 27, 1998, the Company and certain of its affiliates completed
a series of  transactions  designed to simplify the  Company's  structure and to
provide future operational  flexibility  (collectively,  the "GFI Transaction").
Prior to the consummation of these  transactions,  Foamex L.P. defeased the $4.5
million  outstanding  principal  amount of its 9 1/2% senior  secured  notes due
2000. Foamex L.P. settled its intercompany  payables to General Felt Industries,
Inc.  ("General  Felt") with $4.8 million in cash and a  promissory  note in the
aggregate  principal amount of $34.0 million supported by a $34.5 million letter
of credit under the Foamex L.P. credit  facility (the  "Foamex/GFI  Note").  The
initial  transaction  resulted in the transfer  from Foamex L.P. to Foam Funding
LLC, an indirect  wholly owned  subsidiary of Trace,  of all of the  outstanding
common stock of General Felt, in exchange for (i) the assumption by Foam Funding
LLC of $129.0  million of Foamex  L.P.'s  indebtedness  and (ii) the transfer by
Foam  Funding  LLC to  Foamex  L.P.  of a 1%  non-managing  general  partnership
interest in Foamex L.P. As a result,  General Felt ceased being a subsidiary  of
Foamex L.P. and was relieved  from all  obligations  under Foamex  L.P.'s 9 7/8%
senior  subordinated  notes due 2007 and 13 1/2% senior  subordinated  notes due
2005.  Upon  consummation  of the initial  transaction,  Foamex Carpet,  a newly
formed wholly owned  subsidiary of the Company,  the Company,  Foam Funding LLC,
and General Felt entered into an Asset  Purchase  Agreement  dated  February 27,
1998,  in which  General Felt sold  substantially  all of its assets (other than
cash, the Foamex/GFI Note and its operating facility in Pico Rivera, California)
to Foamex Carpet in exchange for (i) $20.0 million in cash and (ii) a promissory
note  issued by Foamex  Carpet to Foam  Funding LLC in the  aggregate  principal
amount of $70.2  million.  The $20.0  million  cash  payment  was funded  with a
distribution by Foamex L.P. Upon  consummation of the transactions  contemplated
by the Asset Purchase  Agreement,  Foamex Carpet entered into a credit agreement
with the  institutions  from time to time party  thereto as issuing  banks,  and
Citicorp USA, Inc. and The Bank of Nova Scotia, as administrative  agents, which
provides for up to $20.0 million in revolving credit  borrowings.  Foamex Carpet
conducts the carpet cushion business previously conducted by General Felt. Also,
Foam  Funding  LLC  retained  ownership  of  one  of  General  Felt's  operating
facilities,  which is being  leased to  Foamex  Carpet,  and the  $34.0  million
Foamex/GFI Note.

       On  December  23,  1997,  the Company  acquired  Crain  Industries,  Inc.
("Crain")  pursuant  to a merger  agreement  with  Crain  Holdings  Corp.  for a
purchase price of approximately $213.7 million,  which was primarily funded with
$118.0  million of bank  borrowings  under a Foamex L.P.  credit  facility  (the
"Credit Facility") and the assumption of debt with a face value of approximately
$98.6 million (and an estimated fair value of approximately $112.3 million) (the
"Crain Acquisition").  In addition,  fees and expenses associated with the Crain
Acquisition were approximately $13.2 million.

                                      F-9
<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       Consolidation

       The consolidated financial statements include the accounts of the Company
and all subsidiaries  that the Company directly or indirectly  controls,  either
through majority ownership or otherwise.  Intercompany accounts and transactions
for continuing operations have been eliminated in consolidation.

       Fiscal Year

       Effective September 1998, management of the Company decided to change the
year-end  reporting  requirement  of the Company from a fifty-two or fifty-three
week fiscal year ending on the Sunday closest to the end of the calendar year to
a  calendar  year  ending  December  31st  to  improve  the  internal  reporting
requirements  of the  Company.  This change was  effective  for the third fiscal
quarter of 1998 which ended on September  30, 1998 and resulted in a 1998 fiscal
year end of December 31, 1998 as compared to January 3, 1999.  Fiscal years 1997
and 1996 were  composed of  fifty-two  weeks and ended on December  28, 1997 and
December 29, 1996, respectively.

       Accounting Estimates

       The  preparation  of financial  statements in conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
contingent  assets  and  contingent  liabilities  at the  date of the  financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting periods. Actual results could differ from those estimates.

       Revenue Recognition

       Revenue from sales is recognized  when products are shipped at which time
title passes to the customer.

       Sales Discounts

       A reduction  in sales  revenue is  recognized  for sales  discounts  when
product is invoiced.

       Cash Equivalents

       The Company  considers  all highly  liquid  investments  with an original
maturity  of three  months or less when  purchased  to be cash  equivalents.  On
December 31, 1998 and December 28, 1997, cash and cash equivalents included $9.3
million and $2.7 million,  respectively, of repurchase agreements collateralized
by U.S. Government securities.

       Inventories

       Inventories  are stated at the lower of cost or  market.  The cost of the
inventories is determined on a first-in, first-out basis.

       Property, Plant and Equipment

       Property,  plant and  equipment  are  stated at cost and are  depreciated
using the  straight-line  method over the estimated  useful lives of the assets.
The range of  useful  lives  estimated  for  buildings  is  generally  twenty to
thirty-five  years,  and the range for machinery,  equipment and  furnishings is
five to twelve years.  Leasehold  improvements are amortized over the shorter of
the  terms  of the  respective  leases  or the  estimated  useful  lives  of the
leasehold improvements.  Depreciation expense for the years ended 1998, 1997 and
1996 was $27.3  million,  $18.8  million and $19.1  million,  respectively.  For
income tax purposes, the Company uses accelerated depreciation methods.

                                      F-10
<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

       Cost of  maintenance  and  repairs is  charged  to  expense as  incurred.
Renewals and improvements are capitalized.  Upon retirement or other disposition
of items of plant and equipment,  the cost and related accumulated  depreciation
are removed from the accounts and any gain or loss is included in operations.

       Debt Issuance Costs

       Debt issuance  costs consist of amounts  incurred in obtaining  long-term
financing.  These costs are being  amortized  over the term of the related  debt
using the effective interest method. Accumulated amortization as of December 31,
1998 and December  28, 1997 was  approximately  $2.9  million and $1.4  million,
respectively.

       Cost in Excess of Net Assets Acquired

       The  excess of the  acquisition  cost over the fair  value of net  assets
acquired in business combinations  accounted for as purchases is amortized using
the  straight-line  method over a forty year period.  At each balance sheet date
the  Company  evaluates  the  recoverability  of cost in  excess  of net  assets
acquired  using  certain  financial  indicators  such as  historical  and future
ability to  generate  income and cash  flows  from  operations  based on a going
concern basis. Accumulated amortization as of December 31, 1998 and December 28,
1997 was  approximately  $17.1 million and $12.0 million,  respectively.  During
1998,  the Company  recorded  approximately  $2.3  million  associated  with the
impairment of cost in excess of net assets  acquired  associated with a Montreal
Canada facility.

       Environmental Matters

       Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Expenditures that relate to an existing condition
caused by past  operations,  and which do not  contribute  to  current or future
revenue  generation,  are expensed.  Liabilities are recorded when environmental
assessments and/or remedial efforts are probable and the costs can be reasonably
estimated.

       Postretirement and Postemployment Benefits

       The Company  accrues  postretirement  benefits  throughout the employees'
active service  periods until they attain full  eligibility  for those benefits.
Also, the Company accrues postemployment  benefits when it becomes probable that
such  benefits  will be paid  and when  sufficient  information  exists  to make
reasonable estimates of the amounts to be paid.

       Comprehensive Income

       As of December 28,  1997,  we adopted  Statement of Financial  Accounting
Standards No. 130, Reporting  Comprehensive  Income ("SFAS No. 130"),  issued in
June 1997.  SFAS No. 130 requires  the  reporting  and display of  comprehensive
income,  which is composed of net income and other comprehensive  income or loss
items,  in  a  full  set  of  general  purpose   financial   statements.   Other
comprehensive income or loss items are revenues, expenses, gains and losses that
under generally accepted accounting  principles are excluded from net income and
reflected as a component  of equity,  such as currency  translation  and minimum
pension liability adjustments.

       Foreign Currency Accounting

       The  financial  statements of foreign  subsidiaries,  except in countries
treated as highly inflationary (Mexico),  have been translated into U.S. dollars
by using the year end exchange rates for the assets and  liabilities and average
exchange  rates  for  the  statements  of   operations.   Currency   translation
adjustments  are  included in other  stockholders'  equity  (deficit)  until the
entity is substantially sold or liquidated.  For operations in countries treated
as highly  inflationary,  such as Mexico  for 1998 and 1997,  certain  financial
statement  amounts are translated at historical  exchange rates,  with all other
assets and liabilities  translated at year-end exchange rates. These translation
adjustments  are reflected in the results of operations  and were  insignificant
for all periods presented.  Also, foreign currency  transaction gains and losses
are insignificant for all periods presented. The effect of foreign currency

                                      F-11
<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

exchange rates on cash flows is not material.  Effective in the first quarter of
1999, the financial results of the Mexican  operations will not be accounted for
as highly inflationary.

       Interest Rate Swap Agreement

       The  differential  to be paid or  received  under an  interest  rate swap
agreement is recognized  as an adjustment to interest and debt issuance  expense
in the current period as interest rates change.

       Income Taxes

       Income taxes are accounted for under the asset and liability  method,  in
which deferred income taxes are provided for temporary  differences  between the
financial  reporting  and income tax basis of assets and  liabilities  using the
income tax rates,  under existing  legislation,  expected to be in effect at the
date such temporary differences are expected to reverse.

       Reclassifications

       Certain amounts in the 1997 and 1996  consolidated  financial  statements
have been reclassified to conform with the current year's presentation.

3.     ACQUISITIONS

       On December 23, 1997,  the Company  acquired  Crain  pursuant to a merger
agreement with Crain Holdings Corp. for a purchase price of approximately $213.7
million,  including the  assumption  of debt with a face value of  approximately
$98.6 million (with an estimated fair value of approximately $112.3 million). In
addition,   fees  and  expenses  associated  with  the  Crain  Acquisition  were
approximately  $13.2  million.  In connection  with the Crain  Acquisition,  the
Company approved a  restructuring/consolidation  plan for the two entities.  The
Company  recorded  restructuring  charges  of  $21.1  million  relating  to  the
restructuring  of  the  Company's   operations  in  connection  with  the  Crain
Acquisition  and  related  transactions.   In  addition,  the  Company  recorded
approximately  $1.5 million of severance  and related costs and $8.5 million for
costs  associated  with the shut down and  consolidation  of certain  facilities
acquired in the Crain Acquisition. (See Note 4.)

       The Crain  Acquisition was accounted for as a purchase and the operations
of Crain have been included in the  consolidated  statements  of operations  and
cash flows from its date of  acquisition.  However,  Crain's  operations for the
period from December 24, 1997 to December 28, 1997 have not been included in the
consolidated  statements  of  operations or cash flows since the affect would be
insignificant. The cost of the Crain Acquisition has been allocated on the basis
of the fair value of the assets  acquired and the  liabilities  assumed.  During
1998,  the Company  increased  the cost in excess of the net assets  acquired by
approximately  $11.2 million as a result of the  finalization of the fixed asset
appraisal and updated estimates of certain former Crain  facilities.  The excess
of the purchase price over the estimated  fair value of the net assets  acquired
of $164.2 million is being amortized using the  straight-line  method over forty
years.

4.     RESTRUCTURING AND OTHER CHARGES (CREDITS)

       In  1995,  the  Company   approved  a   restructuring   plan  (the  "1995
restructuring  plan") to consolidate  thirteen foam  production,  fabrication or
branch locations to concentrate resources as a result of industry conditions and
better position itself to achieve its strategic growth  objectives.  The Company
recorded restructuring and other charges of $41.4 million which was comprised of
$35.6  million  associated  with  the  consolidation  of  the  foam  production,
fabrication or branch locations,  $2.2 million associated with the completion of
a  1993   restructuring  plan  and  $3.6  million  associated  with  merger  and
acquisition  activities  of the Company.  The  components  of the $35.6  million
restructuring  charge include:  $16.7 million for fixed asset writedowns (net of
estimated sale  proceeds),  $15.1 million for plant closure and operating  lease
obligations and $3.8 million for personnel reductions. The $3.8 million


                                      F-12
<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4.     RESTRUCTURING AND OTHER CHARGES (CREDITS) (continued)

cost for  personnel  reductions  primarily  represents  severance  and  employee
benefit  costs   associated   with  the   elimination   of   manufacturing   and
administrative personnel.

       In 1996,  the  Company  determined  to  continue  to  operate  one of the
facilities  originally  identified  for  closure  in a 1995  restructuring  plan
because  of  improved  economics  and the lack of synergy  to be  achieved  from
relocating the manufacturing  process. In addition,  the Company approved a plan
to  close  two  facilities  that  were  not  originally  identified  in  a  1995
restructuring  plan. As a result of these changes to the 1995 restructuring plan
and the favorable termination of certain lease agreements and other matters, the
Company  recorded a $6.5  million  net  restructuring  credit  which  included a
restructuring credit of $11.3 million associated with the Company's decision not
to close the facility identified as part of the 1995 restructuring plan and $1.8
million of restructuring credits relating primarily to the favorable termination
of certain lease agreements and other matters relating to the 1995 restructuring
plan, offset by $6.6 million of restructuring charges relating to the closure of
the two facilities during 1997 (the "1996 restructuring plan").

       During  December 1997,  the Company  approved a  restructuring  plan (the
"1997 restructuring  plan") to consolidate nine foam production,  fabrication or
branch  locations in connection  with the Crain  Acquisition.  (See Note 3.) The
Company  recorded  restructuring  and other  charges of $21.1  million which was
comprised  of  $23.0  million  associated  with  the  consolidation  of the foam
production,   fabrication  or  branch   locations  offset  by  $1.9  million  of
restructuring  credits due  primarily to the  favorable  termination  of certain
lease   agreements  and  other  matters   associated  with  the  1996  and  1995
restructuring  plans. The components of the $23.0 million  restructuring  charge
include:  $12.1  million for fixed  assets  writedowns  (net of  estimated  sale
proceeds),  $9.8 million for plant closure and operating  lease  obligations and
$1.1 million for personnel reductions.

       In addition,  during 1997, the Company  approved a consolidation  plan to
integrate the acquired Crain facilities into the Company's existing  facilities.
The Company recorded  approximately  $1.5 million of severance and related costs
and $8.5  million for costs  associated  with the shut down of certain  acquired
facilities.

       During 1998, the Company determined to continue to operate two facilities
originally  identified for closure in the 1997 restructuring  plan. One facility
remained open to fill lost capacity  resulting  from a fire in April 1998 at the
Orlando  facility,  which is expected to be at full production during the second
quarter of 1999.  The other  facility  remained open during 1998 due to improved
demand on the West Coast. The 1997  restructuring plan also included the closure
of two facilities associated with the packaging business. The Company intends to
sell the packaging  business  during 1999 and does not expect to incur the asset
write-down  and lease  costs as  originally  planned.  As a result,  the Company
recorded  a  $15.1  million   restructuring  credit  associated  with  the  1997
restructuring  plan.  The components of the $15.1 million  restructuring  credit
include:  $10.2  million for fixed  asset  write-downs,  $3.8  million for plant
closure  and  operating  lease   obligations  and  $1.1  million  for  personnel
reductions.

       In addition, the Company recorded restructuring and other charges of $5.4
million during 1998 to reserve for approximately $3.1 million of net receivables
due from Trace and to write-down approximately $2.3 million of impaired goodwill
associated  with a foreign  facility.  Also,  during 1998, the Company  incurred
additional plant closure costs of $5.2 million and personnel  reduction costs of
$1.2 million  associated  with the closure of the former Crain  facilities.  The
additional  costs  associated  with the closure of the former  Crain  facilities
resulted in an increase to goodwill.

       Except as discussed  above,  the 1997 and 1996  restructuring  plans have
been generally implemented as originally contemplated.  The following table sets
forth the components of the Company's restructuring and other charges:


                                      F-13
<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4.     RESTRUCTURING AND OTHER CHARGES (CREDITS) (continued)
<TABLE>
<CAPTION>
                                                       Asset         Plant Closure      Personnel
                                           Total    Writedowns         and Leases       Reductions        Other   
                                                                       (millions)
<S>                                      <C>          <C>               <C>              <C>             <C>  
       Balances at December 31, 1995      $15.9        $(4.2)            $14.8            $ 3.7           $ 1.6
       Cash spending                       (9.9)           -              (6.6)            (2.0)           (1.3)
       Cash proceeds                        1.0          1.0                 -                -               -
       1996 restructuring charge            6.6          2.4               4.1              0.1               -
       Restructuring credits              (13.1)        (9.7)             (2.8)            (0.4)           (0.2)
       Asset adjustment for
         restructuring credits              8.0          8.7              (0.6)               -            (0.1)
                                          -----       ------             -----           ------           -----

       Balances at December 29, 1996        8.5         (1.8)              8.9              1.4               -
       Cash spending                       (2.3)          -               (1.4)            (0.9)              -
       1997 restructuring charge           23.0         12.1               9.8              1.1               -
       Restructuring credits               (1.9)         0.1              (2.3)             0.3               -
       Asset write-off/writedowns         (16.1)       (16.1)                -                -               -
       Plant consolidation costs           10.0            -               8.5              1.5               -
                                          -----       ------             ------            -----          -----

       Balance at December 28, 1997        21.2         (5.7)             23.5              3.4               -
       Cash spending                      (15.7)           -             (12.2)            (3.5)              -
       Cash proceeds                        2.1          2.1                 -                -               -
       1998 restructuring charge            5.4          5.4                 -                -               -
       1998 restructuring credit          (15.1)       (10.2)             (3.8)            (1.1)              -
       Asset write-off/writedowns          (6.3)        (5.5)             (0.8)               -               -
       Reclassified fixed asset basis
         for restructuring credit           8.2          8.2                 -                -               -
       Plant consolidation costs            6.4            -               5.2              1.2               -
                                          -----       ------             -----           ------           -----

       Balance at December 31, 1998       $ 6.2       $ (5.7)            $11.9          $     -           $   -
                                          =====       ======             =====          =======           =====
</TABLE>

       As  indicated  in the table above,  the accrued  restructuring  and plant
consolidation balance at December 31, 1998 will be used for payments relating to
plant closure and leases  including  rundown costs at the  facilities.  The $5.7
million of asset  writedowns  relates to  estimated  proceeds and is included in
noncurrent  assets.  The Company expects to incur  approximately $2.9 million of
charges during 1999 with the remaining $9.0 million to be incurred through 2006.

5.       INVENTORIES

       Inventories consists of (thousands):
                                       December 31,     December 28,
                                           1998             1997      
                                         --------        --------
       Raw materials and supplies        $ 99,997        $ 75,487
       Work-in process                     12,188          15,620
       Finished goods                      24,473          29,192
                                         --------        --------
       Total                             $136,658        $120,299
                                         ========        ========

6.     SHORT-TERM BORROWINGS

       Short-term  borrowings  include  borrowings  outstanding  under a line of
credit facility for Foamex Canada Inc. ("Foamex Canada") bearing interest at the
bank's prime rate (6.75% at December 31, 1998) plus 1/2%.  The weighted  average
interest rates on Foamex Canada's  short-term  borrowings  outstanding for 1998,
1997 and 1996 were 7.3%, 5.4% and 5.9%,  respectively.  Borrowings  under Foamex
Canada's  credit facility are due on demand and are  collateralized  by accounts
receivable, property and inventories of Foamex Canada having an approximate net

                                      F-14
<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.     SHORT-TERM BORROWINGS (continued)

carrying value of $17.7 million as of December 31, 1998. The unused amount under
this line of credit totaled approximately $2.3 million as of December 31, 1998.

7.     CURRENT PORTION OF LONG-TERM DEBT, LONG-TERM DEBT AND EXTRAORDINARY LOSS

       For the year  ended  December  31,  1998,  the  Company  had a loss  from
continuing operations,  a working capital deficit and was not in compliance with
certain debt covenants for which it is seeking  amendments.  Such non-compliance
provides the lenders under those agreements, which have an aggregate outstanding
principal amount of approximately  $480.4 million,  with the right,  upon notice
and lapse of time to declare all of such indebtedness to be due. Notwithstanding
the fact that to date the lenders have not executed such rights and have granted
the Company a waiver of such covenants through May 5, 1999 to enable the Company
to negotiate an amendment of such covenants; there can be no assurance that such
amendments will be obtained and therefore such  indebtedness has been classified
as current in the Company's financial  statements.  Were the lenders under those
agreements to accelerate the maturity of their  indebtedness,  such acceleration
would  constitute  an event of default and  substantially  all of the  Company's
long-term debt.  Therefore,  the Company has reclassified  approximately  $771.1
million of long-term debt as current.  Such  classification  raises  substantial
concern about the Company's ability to continue as a going concern.

       Current portion of long-term debt and long-term consists of:

<TABLE>
<CAPTION>
                                                                            December 31,    December 28,
                                                                                1998            1997     
                                                                             --------        --------
     <S>                                                                    <C>             <C>     
       Credit Facility:                                                           (thousands)
         Term Loan A (1)                                                     $     --        $ 76,700
         Term Loan B (1)                                                       82,714         109,725
         Term Loan C (1)                                                       75,194          99,750
         Term Loan D (1)                                                      108,900         110,000
         Revolving credit facility (1)                                        139,438          54,928
       9 7/8% Senior subordinated notes due 2007 (2)                          150,000         150,000
       13 1/2% Senior subordinated notes due 2005 (includes
         $11,893 and $13,720 of unamortized debt premium) (2)                 109,893         111,720
       9 1/2% Senior secured notes due 2000 (3)                                    --           4,523
       Industrial revenue bonds (4)                                             7,000           7,000
       Subordinated note payable (net of unamortized
         debt discount of $523 and $1,198) (4)                                  6,491           6,129
       Other                                                                   18,858          18,180
                                                                             --------        --------
                                                                              698,488         748,655

       Less current portion                                                   690,248          12,931
                                                                             --------        --------

       Long-term debt-unrelated parties                                      $  8,240        $735,724
                                                                             ========        ========

       Current portion of long-term debt - related party consists of:

       Foamex/GFI Note (4)                                                   $ 34,000        $     --
       Note payable to Foam Funding LLC (5)                                    64,935              --
                                                                             --------        --------

       Long-term debt - related party (classified as current)                $ 98,935        $     --
                                                                             ========        ========
</TABLE>

                                      F-15

<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.     CURRENT PORTION OF LONG-TERM DEBT,  LONG-TERM DEBT AND EXTRAORDINARY LOSS
       (continued)

       (1)    Subsidiary  debt of Foamex  L.P.,  guaranteed  by the  Company and
              Foamex Capital Corporation ("FCC").
       (2)    Subsidiary debt of Foamex L.P. and FCC.
       (3)    Subsidiary debt of Foamex L.P. and FCC, guaranteed by the Company.
       (4)    Subsidiary debt of Foamex L.P.
       (5)    Subsidiary debt of Foamex Carpet.

       Credit Facility

       On June 12, 1997,  Foamex L.P.  entered into the Credit  Facility  with a
group of banks that provides for term loans of up to $440.0 million which expire
from June 2003 to December 2006 and  borrowings of up to $150.0  million under a
revolving  line of  credit  which  expires  in June  2003.  The term  loans  are
comprised of (i) term A loan ("Term A") which  provides up to $120.0  million of
borrowings,  (ii) term B loan  ("Term B") of $110.0  million,  (iii) term C loan
("Term C") of $100.0 million and (iv) term D loan ("Term D") of $110.0 million.

       In connection with the GFI Transaction  (see Note 1), Foamex L.P. amended
its  agreements  with the  lenders  under the Credit  Facility,  which  included
additional borrowings of $129.0 million under new term loan agreements that were
assumed by Foam Funding LLC and  borrowings  of $32.7 million under the existing
revolving  credit  facility.  These  funds were used to (i) repay  approximately
$125.1  million  of  existing  term  loans  and  accrued   interest  thereon  of
approximately $0.9 million,  (ii) deposit $4.8 million into an escrow account in
order to redeem the senior  secured  notes  during  June 1998,  (iii) repay $4.8
million of indebtedness  owed to General Felt which was retained by Trace,  (iv)
fund the $20.0  million  to acquire  the net  assets of  General  Felt after the
transfer  of the  General  Felt stock to Foam  Funding  LLC and (v) pay fees and
expenses of  approximately  $5.4 million.  Also,  this  amendment  increased the
availability  under the revolving  credit facility from $150.0 million to $200.0
million, subject to a $2.5 million quarterly reduction of the availability under
the revolving credit facility  effective  September 30, 1998, with $34.5 million
of the  increased  availability  used for a letter  of  credit  to  support  the
Foamex/GFI Note (described below).

       Borrowings under the Credit Facility are  collateralized by substantially
all of the assets of Foamex L.P. on a pari passu basis with the IRBs  (described
below);  however,  the rights of the holders of the applicable issue of the IRBs
to receive payment upon the disposition of the collateral securing such issue of
the IRBs has been preserved.

       Pursuant to the terms of the Credit  Facility,  borrowed  funds will bear
interest at a floating rate equal to an applicable margin, as defined,  plus the
higher of (i) the base rate of The Bank of Nova  Scotia,  in effect from time to
time, or (ii) a rate that is equal to 0.5% per annum plus the federal funds rate
in effect from time to time.  The applicable  margin is determined  based on the
total net debt to EBDAIT ratio,  as defined,  and can range from no margin up to
1.125% per annum for Term A and revolving loans, from 0.875% per annum to 1.375%
per annum for Term B, from  1.125%  per annum to 1.625% per annum for Term C and
from  1.250%  per annum to 1.750%  per  annum  for Term D ("Base  Rate  Interest
Loans").  At the option of Foamex L.P.,  portions of the outstanding loans under
the Credit Facility are  convertible  into LIBOR based loans which bear interest
at a floating  rate equal to an  applicable  margin for LIBOR  based  loans,  as
defined,  plus the average LIBOR,  as defined.  The applicable  margin for LIBOR
based loans is a rate that will generally equal the applicable margin (discussed
above) plus 1.0% per annum. Pursuant to a March 11, 1999 amendment to the Credit
Facility,  the applicable margin for revolving loans as Base Rate Interest Loans
as determined  based on the total net debt to EBDAIT ratio will range from 1.50%
per annum to 2.25% per annum and the  applicable  margins for Term B, Term C and
Term D as Base Rate Interest  Loans will be fixed at 2.50% per annum,  2.75% per
annum and 2.875% per annum, respectively.  The applicable margin for LIBOR based
loans will equal the  applicable  margin for Base Rate Interest  Loans plus 1.0%
per annum. As of December 31, 1998, the interest rates for revolver  borrowings,
Term B, Term C and Term D were 7.80%, 8.00%. 8.25% and 8.4375%, respectively.

                                      F-16
<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.     CURRENT PORTION OF LONG-TERM DEBT,  LONG-TERM DEBT AND EXTRAORDINARY LOSS
       (continued)

       Foamex  L.P.  had  a  credit  agreement  (the  "Foamex  L.P.  Old  Credit
Facility")  with a group of banks that provided for loans of up to $85.0 million
of which up to $40.0  million was available as a term loan and $45.0 million was
available  under a revolving  line of credit.  During 1997,  $3.8 million of net
proceeds from the Perfect Fit Industries,  Inc. sale was used to repay term loan
borrowings.  The term loan was repaid in connection  with the  Refinancing  Plan
(described below).

       9 7/8% Senior Subordinated Notes due 2007 ("Senior Subordinated Notes")

       The Senior  Subordinated  Notes  were  issued by Foamex  L.P.  and FCC in
connection with the Refinancing  Plan. The Senior  Subordinated  Notes represent
uncollateralized  general obligations of Foamex L.P. and are subordinated to all
Senior Debt (as defined in the Indenture).  The Senior  Subordinated  Notes bear
interest at the rate of 9 7/8% per annum  payable  semiannually  on each June 15
and December 15,  commencing  December 15, 1997. The Senior  Subordinated  Notes
mature on June 15, 2007.  The Senior  Subordinated  Notes may be redeemed at the
option of Foamex  L.P.,  in whole or in part,  at any time on or after  June 15,
2002, initially at 104.938% of their principal amount, plus accrued interest and
liquidated  damages,  as defined,  if any, thereon to the date of redemption and
declining to 100.0% on or after June 15, 2005. In addition, at any time prior to
June 15, 2000,  Foamex L.P. may on one or more  occasions  redeem up to 35.0% of
the initially outstanding principal amount of the Senior Subordinated Notes at a
redemption  price  equal to  109.875%  of the  principal  amount,  plus  accrued
interest and liquidated  damages, if any, thereon to the date of redemption with
the cash proceeds of one or more Public Equity Offerings,  as defined.  Upon the
occurrence  of  a  change  of  control,  as  defined,   each  holder  of  Senior
Subordinated  Notes will have the right to require Foamex L.P. to repurchase the
Senior  Subordinated  Notes at a price equal to 101.0% of the principal  amount,
plus accrued interest and liquidated damages, if any, to the date of repurchase.
The Senior Subordinated Notes are subordinated in right of payment to all senior
indebtedness  and are  pari  passu in right  of  payment  to the 13 1/2%  Senior
Subordinated Notes and the Subordinated Note Payable (described below).

       13 1/2%  Senior  Subordinated  Notes due 2005,  Series B ("13 1/2% Senior
Subordinated Notes")

       The 13 1/2% Senior  Subordinated Notes were issued by Foamex L.P. and FCC
in connection with the Crain Acquisition.  The 13 1/2% Senior Subordinated Notes
represent   uncollateralized   general   obligations  of  Foamex  L.P.  and  are
subordinated  to all  Senior  Debt (as  defined in the  Indenture).  The 13 1/2%
Senior Subordinated Notes bear interest at the rate of 13 1/2% per annum payable
semiannually on each February 15 and August 15. The 13 1/2% Senior  Subordinated
Notes mature on August 15, 2005.  The 13 1/2% Senior  Subordinated  Notes may be
redeemed at the option of Foamex  L.P.,  in whole or in part,  at any time on or
after August 15,  2000,  initially at 106.75% of their  principal  amount,  plus
accrued  interest,  if any,  thereon to the date of redemption  and declining to
100.0% on or after August 15, 2004.  Upon the occurrence of a change of control,
as defined,  each holder of the 13 1/2% Senior  Subordinated Notes will have the
right to require Foamex L.P. to repurchase the 13 1/2% Senior Subordinated Notes
at a price equal to 101.0% of the principal  amount,  plus accrued  interest and
liquidated  damages,  if any,  to the  date of  repurchase.  The 13 1/2%  Senior
Subordinated  Notes  are  subordinated  in right of the  payment  of all  senior
indebtedness  and are pari passu in right of payment to the Senior  Subordinated
Notes and to the Subordinated Note Payable (described below).

       9 1/2% Senior Secured Notes due 2000 ("Senior Secured Notes")

       The Senior Secured Notes were issued on June 3, 1993 with interest at the
rate of 9 1/2%  payable  semiannually  on each June 1 and December 1. The Senior
Secured Notes had a maturity date of June 1, 2000. The Senior Secured Notes were
collateralized  by a first-priority  lien on substantially  all of the assets of
Foamex L.P. except for receivables, real estate and fixtures. The Senior Secured
Notes were defeased in February 1998 and redeemed in June 1998.

                                      F-17
<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.     CURRENT PORTION OF LONG-TERM DEBT, LONG-TERM DEBT AND EXTRAORDINARY
       LOSS (continued)

       Industrial Revenue Bonds ("IRBs")

       Two bond issues in the principal amount of $1.0 million and $6.0 million,
maturing  in  2005  and  2013,  respectively,   are  collateralized  by  certain
properties,  which have an  approximate  net carrying  value of $11.1 million at
December 31, 1998 and letters of credit  approximating  $7.3  million.  The IRBs
bear  interest  at a variable  rate with  options  available  to Foamex  L.P. to
convert to a fixed rate.  The  interest  rates on the IRBs were 4.0% and 3.4% at
December   31,  1998  for  the  $6.0  million  and  $1.0  million  bond  issues,
respectively.  The interest  rate on the $6.0  million bond issue varies  weekly
based on an interest rate that is indicative of current  bidside  yields on high
quality  short-term,  tax-exempt  obligations,  or if such  interest rate is not
available,  70.0% of the interest rate for thirteen week United States  Treasury
Bills.  The maximum  interest rate for either of the IRBs is 15.0% per annum. At
the time of a conversion to a fixed interest rate and upon  appropriate  notice,
the IRBs are redeemable at the option of the bondholders.

       Subordinated Note Payable

       This note  payable was issued to John Rallis,  a former  Chief  Operating
Officer of the  Company,  on May 6, 1993 by Foamex L.P. in  connection  with the
acquisition  of Great  Western Foam  Products  Corporation  and certain  related
entities and assets.  The note bears  interest at a maximum rate of 6% per annum
and the principal amount is payable in three equal annual installments beginning
May 6, 1999.

       Other

       As of December  31, 1998,  other debt is  comprised  primarily of capital
lease obligations, equipment financing associated with an aircraft (see Note 23)
and borrowings by the Mexican subsidiaries.

       Foamex Carpet Credit Facility ("Foamex Carpet Credit Facility")

       In February 1998,  Foamex Carpet entered into a credit agreement with the
institutions from time to time party thereto, as issuing banks and lenders,  and
Citicorp USA, Inc. and The Bank of Nova Scotia, as administrative  agents, which
provides for up to $20.0 million in revolving  credit  borrowings and expires in
February  2004.   Borrowing   under  the  Foamex  Carpet  Credit   Facility  are
collateralized  by all of the assets of Foamex Carpet on a pari passu basis with
the Note Payable to Foam Funding LLC  (described  below).  At December 31, 1998,
there were no outstanding  borrowings  under the Foamex Carpet Credit  Facility;
however, there was a letter of credit outstanding in the amount of approximately
$0.7 million.  On March 12, 1999,  Foamex Carpet elected to reduce  availability
under the Foamex Carpet Credit Facility to $15.0 million.

       Pursuant  to the terms of the Foamex  Carpet  Credit  Facility,  borrowed
funds will bear  interest at a floating  rate equal to the sum of 2.0% per annum
plus the higher of (i) the base rate of The Bank of Nova Scotia,  in effect from
time to time or (ii) a rate  that is equal to 0.5% per  annum  plus the  federal
funds rate in effect from time to time. At the option of Foamex Carpet, portions
of  outstanding  loans under the Foamex Carpet Credit  Facility are  convertible
into LIBOR based loans which bear  interest at a floating  rate equal to the sum
of 3.0% per annum plus the average LIBOR, as defined.

       Foamex/GFI Note

       In connection  with the transfer of General  Felt's common stock,  in the
GFI Transaction,  Foamex L.P. entered into the $34.0 million  Foamex/GFI Note to
settle an existing intercompany note payable to General Felt, which was retained
by Foam Funding LLC in connection with the asset purchase  agreement for the GFI
Transaction  (see Note 13). The principal and current interest payable under the
Foamex/GFI Note are secured by a $34.5 million letter of credit issued under the
Credit Facility. The principal amount is due upon maturity in March 2000.

                                      F-18

<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.     CURRENT PORTION OF LONG-TERM DEBT, LONG-TERM DEBT AND EXTRAORDINARY
       LOSS (continued)

       Pursuant to the terms of the Foamex/GFI Note, the note will bear interest
at a floating  rate equal to the higher of (i) the base rate of the  Holder,  as
defined,  in effect from time to time,  or (ii) a rate that is equal to 0.5% per
annum plus the federal  funds rate in effect from time to time. At the option of
Foamex L.P.,  interest  payable  under the note is converted  into a LIBOR based
interest  rate at a  floating  rate equal to the sum of 0.75% per annum plus the
average  LIBOR,  as defined.  As of December  31, 1998,  the  interest  rate for
borrowings was 6.3125%.

       Note Payable to Foam Funding LLC

       In connection  with the asset purchase  agreement for the GFI Transaction
(see Note 13),  Foamex Carpet entered into a $70.2 million  promissory note with
Foam Funding LLC. Amounts outstanding under the Note Payable to Foam Funding LLC
are collateralized by all the assets of Foamex Carpet on a pari passu basis with
the Foamex Carpet Revolving Credit and subject to quarterly payments  commencing
June 30,  1998  through  March  31,  1999 in the  amount of  approximately  $1.8
million,  June 30, 1999  through  March 31, 2000 in the amount of  approximately
$2.6  million  and June 30,  2001  through  December  31,  2003 and at the final
maturity on February 25, 2004 in the amount of approximately $3.5 million.

       Pursuant to the terms of the Note  Payable to Foam  Funding LLC, the note
will bear  interest  at a floating  rate equal to the sum of 2.0% per annum plus
the higher of (i) the base rate of the Holder,  as defined,  in effect from time
to time,  or (ii) a rate that is equal to 0.5% per annum plus the federal  funds
rate in effect  from time to time.  At the  option  of Foamex  Carpet,  interest
payable  under the note is  convertible  into a LIBOR based  interest  rate at a
floating  rate equal to the sum of 3.0% per annum  plus the  average  LIBOR,  as
defined. As of December 31, 1998, the interest rate for borrowings was 8.5625%.

       Refinancing Plan

       On June 12, 1997, the Company substantially  completed a refinancing plan
(the  "Refinancing  Plan") that included the  refinancing  of certain  long-term
indebtedness  to reduce the  Company's  interest  expense and improve  financing
flexibility.  In connection with the  Refinancing  Plan,  Foamex L.P.  purchased
approximately  $342.3 million of aggregate  principal  amount of its public debt
and  approximately  $116.7 million of aggregate  principal  amount of Foamex-JPS
Automotive  L.P.'s  ("FJPS")  senior secured  discount  debentures due 2004 (the
"Discount  Debentures") and repaid $5.2 million of term loan borrowings under an
existing credit  facility.  The Refinancing Plan was funded by $347.0 million of
borrowings  under a new $480.0 million credit  facility (the "Credit  Facility")
and the net proceeds from the issuance of $150.0 million of Senior  Subordinated
Notes.

       In  connection  with  the  Refinancing  Plan,  the  Company  incurred  an
extraordinary  loss on the early  extinguishment of debt of approximately  $42.0
million (net of income tax benefits of $25.7 million). The extraordinary loss is
comprised of  approximately  $39.0 million for premium and consent fee payments,
approximately  $16.2 million for the  write-off of debt issuance  costs and debt
discount,  approximately $8.2 million for the loss associated with the effective
termination  and amendment of interest rate swap  agreements  and  approximately
$4.3  million of  professional  fees and other  costs.  In  connection  with the
Refinancing  Plan, the Company repaid $5.2 million in term loan borrowings under
the Credit  Facility and  purchased  approximately  $459.0  million of aggregate
principal amount of public debt comprised of:

o      $99.8 million of aggregate  principal amount of its 9 1/2% senior secured
       notes due 2000 for an  aggregate  consideration  of 104.193% of principal
       plus  accrued  interest,  comprised  of a tender  price of 102.193% and a
       consent fee of 2.0%;

o      $130.1 million of aggregate  principal amount of its 11 1/4% senior notes
       due 2002 for an aggregate  consideration  of 105.709% of  principal  plus
       accrued  interest,  comprised of a tender price of 103.709% and a consent
       fee of 2.0%;

                                      F-19

<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.     CURRENT PORTION OF LONG-TERM DEBT, LONG-TERM DEBT AND EXTRAORDINARY
       LOSS (continued)

o      $105.5  million  of  aggregate  principal  amount  of its 11 7/8%  senior
       subordinated  debentures  due  2004  for an  aggregate  consideration  of
       107.586% of principal plus accrued interest,  comprised of a tender price
       of 105.586% and a consent fee of 2.0%;

o      $6.9  million  of  aggregate  principal  amount  of  its 11  7/8%  senior
       subordinated   debentures,   series   B,  due   2004  for  an   aggregate
       consideration of 107.586% of principal plus accrued  interest,  comprised
       of a tender price of 105.586% and a consent fee of 2.0%; and

o      $116.7 million of aggregate  principal amount of the Discount  Debentures
       for an  aggregate  consideration  of 90.0%  of  principal  amount,  which
       represents approximately 116.2% of the accreted book value as of June 12,
       1997,  comprised  of a tender  price of 88.0% of  principal  amount and a
       consent fee of 2.0%.

       In  addition,  on  October  1,  1997,  Foamex  L.P.  redeemed  all of the
outstanding: (i) 11 1/4% senior notes due 2002, (ii) 11 7/8% senior subordinated
debentures  due 2004 and (iii) the 11 7/8% senior  subordinated  debentures  due
2004,  Series B, constituting  approximately  $26.2 million of the approximately
$30.7  million of  outstanding  public debt that was not tendered as part of the
Refinancing Plan. These redemptions were funded from borrowings under the Credit
Facility.  In  connection  with  these  redemptions,  the  Company  incurred  an
extraordinary  loss on the early  extinguishment  of debt of approximately  $1.3
million (net of income taxes).

       Early Extinguishment of Debt - Other

       In   connection   with  the  GFI   Transaction,   the  Company   incurred
extraordinary  losses of approximately  $1.9 million (net of income tax benefits
of $1.3  million)  associated  with the early  extinguishment  of  approximately
$125.1 million of term loans under the Foamex L.P.  Credit  Facility funded with
$129.0 million of new term loan agreements assumed by Foam Funding LLC (see Note
13). The  extraordinary  loss was generated  entirely from the write-off of debt
issuance costs.

       On October 6, 1997, the Company sold  substantially all of the net assets
of its needlepunch  carpeting,  tufted  carpeting and artificial  grass products
business  located at its facilities in Dalton,  Georgia to Bretlin,  Inc. for an
aggregate sale price of  approximately  $41.0 million.  The Company  realized an
insignificant  gain on the sale in 1997.  The Company used $38.8  million of the
net sale proceeds to repay  outstanding  term loan  borrowings  under the Credit
Facility.   In  connection  with  this  repayment,   the  Company   incurred  an
extraordinary  loss on the early  extinguishment  of debt of approximately  $0.6
million (net of income tax benefits) during 1997.

       In addition,  during 1997, the Company incurred  extraordinary  losses of
approximately  $0.6  million  (net of  income  tax  benefits  of  $0.4  million)
associated  with the early  extinguishment  of  approximately  $11.8  million of
long-term  debt funded with  approximately  $12.1  million of the  remaining net
proceeds  from the sale of Perfect Fit. The  extraordinary  loss is comprised of
approximately  $0.4 million of premium payments and  approximately  $0.6 million
for the write-off of debt issuance costs. The long-term debt was comprised of:

o      $2.5 million of aggregate  principal  amount of its 9 1/2% senior secured
       notes due 2000.

o      $5.5  million of aggregate  principal  amount of its 11 1/4% senior notes
       due 2002.

o      Bank term loan  borrowings  of $3.8  million  under the Foamex  L.P.  Old
       Credit Facility.

       During 1996,  $31.3  million of the net proceeds from the sale of Perfect
Fit was used to extinguish debt of $30.6 million and to pay redemption  premiums
of $0.6  million.  The Company  wrote-off  $1.2 million of debt  issuance  costs
associated with the early  extinguishment of debt and incurred transaction costs
of $0.1 million.  The early  extinguishment of debt resulted in an extraordinary
loss of $1.1  million  (net of $0.8  million  income tax  benefit).  

                                      F-20

<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.     CURRENT PORTION OF LONG-TERM DEBT,  LONG-TERM DEBT AND EXTRAORDINARY LOSS
       (continued)

       Interest Rate Swap Agreements

       The Company enters into interest rate swaps to lower funding costs and/or
to manage interest costs and exposure to changing  interest  rates.  The Company
does not hold or issue financial instruments for trading purposes.

       In connection  with the  Refinancing  Plan,  the Company's  then existing
interest  rate swap  agreements  with a notional  amount of $300.0  million were
considered  to  be  effectively   terminated   since  the  underlying  debt  was
extinguished.  These  interest rate swap  agreements had an estimated fair value
liability of $8.2 million at the date of the Refinancing  Plan which is included
in the extraordinary loss on the early extinguishment of debt. In lieu of a cash
payment for the  estimated  fair value of the then  existing  interest rate swap
agreements,  the Company entered into an amendment of the then existing interest
rate swap  agreements  resulting  in one  interest  rate swap  agreement  with a
notional  amount of $150.0  million  through  June 2007.  Accordingly,  the $8.2
million fair value  liability has been recorded as a deferred  credit which will
be  amortized  as a  reduction  in  interest  and  debt  issuance  expense  on a
straight-line  basis through June 2007. On January 8, 1998, the Company  entered
into a new  amendment to its interest  rate swap  agreement.  The new  amendment
provided for an interest rate swap  agreement  with a notional  amount of $150.0
million  through  June 2002.  In September  1998,  the Company sold its existing
interest  rate swap  agreement  for a net gain of  approximately  $1.0  million.
Accordingly,  the $1.0 million gain has been recorded as a deferred credit which
will  be  amortized  through  June  2007,  which  is the  maturity  date  of the
underlying debt.

       The effect of the  interest  rate  swaps was a  favorable  adjustment  to
interest  and debt  issuance  expense of $0.7  million,  $2.2  million  and $3.7
million for 1998, 1997 and 1996, respectively.

       Debt Restrictions and Covenants

       The  indentures,  credit  facilities  and other  indebtedness  agreements
contain  certain  covenants  that will  limit,  among  other  things to  varying
degrees,  the ability of the Company's  subsidiaries (i) to pay distributions or
redeem  equity  interests,   (ii)  to  make  certain  restrictive   payments  or
investments,  (iii) to incur  additional  indebtedness or issue Preferred Equity
Interest,  as defined,  (iv) to merge,  consolidate or sell all or substantially
all of its assets or (v) to enter into certain  transactions  with affiliates or
related persons. In addition, certain agreements contain provisions that, in the
event of a defined change of control or the occurrence of an undefined  material
adverse  change in the ability of the obligor to perform  its  obligations,  the
indebtedness  must be repaid, in certain cases, at the option of the holder (see
Note 1). Also,  the Company's  subsidiaries  are required under certain of these
agreements to maintain specified  financial ratios of which the most restrictive
are the  maintenance  of net worth  and  interest,  fixed  charge  and  leverage
coverage  ratios,  as defined.  Under the most  restrictive of the  distribution
restrictions,  the Company was  available to be paid by its  subsidiaries  as of
December  31,  1998,  funds only to the extent to enable the Company to meet its
operating and debt obligations.

       Foamex L.P.  amended the Credit Facility on March 11, 1999. The amendment
adjusted  financial  covenants,  among other things, as of December 31, 1998 and
provided  for future  measurement  periods  taking into  account  Foamex  L.P.'s
estimated  operating  results and financial  condition  for 1998 and  management
expectations  regarding future  measurement  periods.  As the Foamex L.P. actual
1998 net loss was worse than  originally  estimated,  on April 15, 1999,  Foamex
L.P. obtained a waiver through May 5, 1999, of the financial covenants contained
in the Credit  Facility and certain events of default arising out of its Mexican
operations,  in order to enable Foamex L.P. to negotiate a further  amendment of
the Credit Facility.

       Foamex  Carpet  amended the Foamex  Carpet  Credit  Facility and the Note
Payable to Foam Funding LLC on March 12, 1999. The amendments adjusted financial
covenants,  among other things,  as of December 31, 1998 and provided for future
measurement  periods taking into account  Foamex  Carpet's  estimated  operating
results and financial condition for 1998 and management  expectations  regarding
future  measurement  periods.  As the Foamex Carpet actual 1998  performance was
worse than  originally  projected,  on April 15, 1999,  Foamex  Carpet  obtained
waivers through May 5, 1999, of the financial  covenants contained in the Foamex
Carpet Credit Facility and the

                                      F-21
<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.     CURRENT PORTION OF LONG-TERM DEBT, LONG-TERM DEBT AND EXTRAORDINARY
       LOSS (continued)

Note Payable to Foam Funding LLC, in order to enable  Foamex Carpet to negotiate
further  amendments of the Foamex Carpet Credit Facility and the Note Payable to
Foam Funding LLC.

       Future Obligations on Debt

       Scheduled  maturities  of debt prior to  reclassification  as current are
shown below (thousands):

       Year End                                         Debt    
       --------                                       --------
       1999                                           $ 18,091
       2000                                             19,244
       2001                                             21,877
       2002                                             18,932
       2003                                            206,749
       Thereafter                                      501,160
                                                      --------
       Total                                           786,053
       Unamortized debt premium, net                    11,370
                                                      --------
       Total                                          $797,423
                                                      ========

8.     EMPLOYEE BENEFIT PLANS

       The  Company  adopted  during the fourth  quarter of 1998,  Statement  of
Financial  Accounting  Standards No. 132, Employees Disclosure about Pension and
Other  Postretirement  Benefits"  ("SFAS No.  132") which  revised the  required
disclosures about pension and other postretirement benefit plans.

       Defined Benefit Pension Plans

       The Company maintains  noncontributory  defined benefit pension plans for
salaried and certain hourly employees.  The salaried plan provides benefits that
are based  principally on years of credited  service and level of  compensation.
The hourly plans provide  benefits that are based  principally on stated amounts
for each year of credited service.

       Net periodic pension cost included the following components:

<TABLE>
<CAPTION>
                                                1998           1997             1996   
                                              -------         -------         -------
                                                            (thousands)
<S>                                           <C>             <C>             <C>    
       Service cost                           $ 2,833         $ 2,229         $ 2,471
       Interest cost                            4,517           4,273           3,997
       Expected return on plan assets          (5,758)         (5,357)         (4,205)
       Amortization of:
         Transition (asset/obligation)            (75)            (75)            (75)
         Prior service cost                      (245)           (245)           (245)
         (Gain)/Losses and other                  104              72             327
                                              -------         -------         -------
           Total                              $ 1,376         $   897         $ 2,270
                                              =======         =======         =======
</TABLE>

       The Company's  funding  policy is to  contribute  annually an amount that
both  satisfies  the minimum  funding  requirements  of the Employee  Retirement
Income Security Act of 1974 and does not exceed the full funding  limitations of
the Internal  Revenue Code of 1986, as amended (the "Code").  The Plan purchased
250,000  shares of the  Company's  stock in 1994 for $2.5  million  and  150,000
shares in 1995 for $1.5  million.  The  value of the  Plan's  investment  in the
Company's stock is  approximately  $5.2 million and $4.6 million at December 31,
1998 and 1997,  respectively.  The Plan purchased  approximately $2.5 million of
shares of Trace Global Opportunities Fund during 1995 and 1997. The value of the
Plan's investment in Trace Global Opportunities Fund, which primarily invests in
companies  organized or operating outside the G-7 markets and is a related party
to Trace, was approximately $4.3

                                      F-22
<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.     EMPLOYEE BENEFIT PLANS (continued)

million and $8.7  million at December  31, 1998 and 1997,  respectively.  During
1998, the Plan  purchased  250,000 shares of United Auto Group ("UAG") stock for
approximately $4.8 million.  The value of the Plan's investment in UAG, which is
a  related  party  to  Trace,  was $2.3  million  at  December  31,  1998.  Plan
investments  consist  primarily of corporate equity and debt securities,  mutual
life insurance funds and cash equivalents.

       During 1998, the discount rate was adjusted to 6.5%. The following  table
sets forth the funded status of the Company's  underfunded plans and the amounts
recognized in the  accompanying  consolidated  balance sheets as of December 31,
1998 and December 28, 1997:

<TABLE>
<CAPTION>
                                                                             December 31,     December 28,
                                                                                 1998             1997       
                                                                               --------        ---------
                                                                                      (thousands)
<S>                                                                            <C>              <C>     
       Change in Benefit Obligation:
         Benefit obligations at end of prior year                              $ 65,948         $ 58,775
         Service cost                                                             2,833            2,229
         Interest cost                                                            4,517            4,273
         Benefits paid (annuities and lump sums)                                 (4,043)          (3,636)
         Actuarial Loss/(Gain)                                                    5,334            4,307
                                                                               --------         --------
           Projected benefit obligation                                        $ 74,589         $ 65,948
                                                                               ========         ========

       Change in Plan Assets:
         Fair value of plan assets at end of prior year                        $ 58,952         $ 53,734
         Actual return on plan assets                                               439            6,308
         Company contributions                                                      200            2,546
         Benefits paid                                                           (4,043)          (3,636)
         Other                                                                       (2)              --
                                                                               --------         --------
           Fair value of plan assets                                           $ 55,546         $ 58,952
                                                                               ========         ========

       Funded Status of the Plan:
         Plan assets in excess of/(less than) benefit obligation               $(19,042)        $ (6,996)
         Unamortized transition (asset) obligation                                 (740)            (815)
         Unamortized prior service cost                                          (2,397)          (2,642)
         Unamortized net (gains)/losses                                          18,711            8,160
                                                                               --------         --------
           Net prepaid assets/(accrued liabilities)                            $ (3,468)        $ (2,293)
                                                                               ========         ========

       Total Recognized Amounts in the Statement of Financial Position:
         Prepaid benefit costs                                                 $  1,200         $  1,749
         Accrued benefit liability                                              (20,150)          (6,274)
         Intangible assets                                                          239              262
         Accumulated other comprehensive income                                  15,243            1,970
                                                                               --------         --------
           Net amount recognized                                               $ (3,468)        $ (2,293)
                                                                               ========         ========
</TABLE>

       Significant  assumptions used in determining the plans' funded status are
as follows:

<TABLE>
<CAPTION>
                                                                 December 31,   December 28,
                                                                    1998           1997       
                                                                  --------       -------
<S>                                                                <C>            <C>   
       Expected long-term rates of return on plan assets           10.00%         10.00%
       Discount rates on projected benefit obligations              6.50%          7.00%
</TABLE>

                                      F-23
<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.     EMPLOYEE BENEFIT PLANS (continued)

       Defined Contribution Plan

       The Company  maintains  a defined  contribution  plan which is  qualified
under  Section  401(k) of the Code and is available  for eligible  employees who
elect to  participate  in the plan.  Employee  contributions  are  voluntary and
subject to certain  limitations  as imposed by the Code.  The  Company  provides
contributions  amounting to a 25% match of employees'  contributions up to 4% of
eligible  compensation.  The Company also  provides an  additional  25% match of
employees'  contributions up to 4% of eligible compensation made to a fund which
invests in the  Company's  common  stock.  In  addition,  the  Company  may make
discretionary contributions amounting to a 25% match of employees' contributions
up to 4% of eligible compensation. The expense for these contributions for 1998,
1997 and 1996 was  approximately  $0.9  million,  $0.9 million and $0.8 million,
respectively.

       Postretirement Benefits

       In  addition  to  providing  pension   benefits,   the  Company  provides
postretirement  health care and life  insurance  for eligible  employees.  These
plans are  unfunded  and the  Company  retains  the right,  subject to  existing
agreements, to modify or eliminate these benefits.

       The components of 1998, 1997 and 1996 expense for postretirement benefits
are as follows:

<TABLE>
<CAPTION>
                                                        1998          1997          1996 
                                                       -----         -----         -----
                                                                   (thousands)
<S>                                                    <C>           <C>           <C>  
       Service costs                                   $  10         $   9         $  12
       Interest cost                                      46            71            67
       Amortization of:
         Prior service costs                             (35)          (35)          (27)
         (Gains)/losses and other                        (29)          (21)          (26)
       Special termination/curtailment loss               --            74           576
                                                       -----         -----         -----

       Net periodic postretirement benefit cost        $  (8)        $  98         $ 602
                                                       =====         =====         =====
</TABLE>

       During  1996,  certain  employees  accepted an early  retirement  program
resulting in a special termination loss of $0.6 million.

       The  following  table  sets  forth the  funded  status  of the  Company's
postretirement plans and the amounts recognized in the accompanying consolidated
balance sheets as of December 31, 1998 and December 28, 1997:

<TABLE>
<CAPTION>
                                                       December 31,     December 28,
                                                           1998            1997
                                                         -------         -------
                                                                (thousands)
       Change in Benefit Obligation:
<S>                                                      <C>             <C>    
         Benefit obligations at end of prior year        $   927         $ 1,012
         Service cost                                         10               9
         Interest cost                                        46              71
         Employee contributions                               27              28
         Benefits paid (annuities and lump sums)            (312)           (220)
         Actuarial Loss/(Gain)                               (47)            (47)
         Special termination benefits                         --              74
                                                         -------         -------
           Projected benefit obligation                  $   651         $   927
                                                         =======         =======
</TABLE>

                                      F-24

<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.     EMPLOYEE BENEFIT PLANS (continued)

<TABLE>
<CAPTION>
                                                                      December 31,    December 28,
                                                                          1998           1997 
                                                                        -------         -------
                                                                              (thousands)
       Change in Plan Assets:
<S>                                                                     <C>             <C>    
         Fair value of plan assets at end of prior year                 $    --         $    --
         Company contributions                                              285             192
         Employee contributions                                              27              28
         Benefits paid (annuities and lump sums)                           (312)           (220)
                                                                        -------         -------
           Fair value of plan assets                                    $    --         $    --
                                                                        =======         =======

       Funded Status of the Plan:
         Plan assets in excess of/(less than) benefit obligation        $  (651)        $  (927)
         Unamortized prior service cost                                    (442)           (477)
         Unamortized net (gains)/losses                                    (573)           (555)
                                                                        -------         -------
           Net prepaid assets/(accrued liabilities)                     $(1,666)        $(1,959)
                                                                        =======         =======
</TABLE>

       The net accrued  benefit  liability  recognized  at December 31, 1998 and
December 28, 1997  resulted in an unfunded  obligation  of $1.7 million and $2.0
million, respectively.

       A 6% and 8% annual rate of  increase  in the per capita  costs of covered
health care benefits was assumed for each of 1998 and 1997,  respectively.  This
rate was assumed to gradually  decrease to 5% by the year 2000.  Increasing  the
weighted  average  assumed health care cost trend rates by one percentage  point
would have an  insignificant  impact on the accumulated  postretirement  benefit
obligation  and service and interest  cost.  The discount rate used was 6.5% and
7.0% as of December 31, 1998 and December 28, 1997, respectively.

       Postemployment Benefits

       The  Company  provides  certain  postemployment  benefits  to  former  or
inactive  employees  and  their  dependents  during  the time  period  following
employment  but before  retirement.  At December 31, 1998 and December 28, 1997,
the Company's  liability for postemployment  benefits was insignificant for each
period.

9.     DISCONTINUED OPERATIONS

       On December 11, 1996, the Company sold its  partnership  interests in JPS
Automotive  for a sale  price of  approximately  $220.1  million  including  the
assumption of $200.1 million of JPS Automotive's indebtedness. The sale included
substantially all of the net assets of the automotive textiles business segment.
Transaction expenses related to the sale amounted to approximately $8.9 million.

       During  1996,  the  Company  recorded  a net  loss  on  the  sale  of JPS
Automotive  of  approximately  $70.9  million (net of $34.2  million  income tax
benefit),  which  includes  the loss on disposal  and a net loss of $1.3 million
(net of $0.7 million income tax benefit) relating to operating losses during the
phase-out   period.   In  December  1997,  the  Company  recorded  a  loss  from
discontinued  operations  of  approximately  $2.0 million (net of income  taxes)
which relates to the final post-closing  settlement  regarding the December 1996
sale of JPS Automotive.

       During 1996,  the Company  finalized the sale of the  outstanding  common
stock of Perfect Fit, a wholly owned  subsidiary,  for an adjusted sale price of
approximately  $44.2  million.  The sale included  substantially  all of the net
assets of the home comfort products  segment.  Actual and estimated  transaction
expenses  related to the sale totaled  approximately  $1.5 million.  The Company
recorded a loss on the sale of Perfect Fit of approximately $43.0 million, which
includes the loss on disposal  and a loss of $2.4 million  relating to operating
losses during the phase-out period.

                                      F-25
<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9.     DISCONTINUED OPERATIONS (continued)

       The  Company's   financial   statements  were  restated  to  reflect  the
discontinuation  of the home comfort  products and automotive  textile  business
segments.  In  addition  to  the  interest  and  debt  issuance  expense  of JPS
Automotive,  interest and debt issuance  expense was  allocated to  discontinued
operations  based on the estimated debt to be retired from the net proceeds from
the sale of Perfect Fit and JPS Automotive.

10.    OTHER INCOME (EXPENSE), NET

       Other income  (expense),  net for 1998  primarily  consists,  among other
things,   of:  $6.5  million  of  costs  associated  with  the  proposed  buyout
transaction, $3.1 million of fees and costs related to the GFI Transaction, $3.0
million of foreign  currency  translation and transaction  losses,  $1.0 million
impairment  write down of an investment  deemed to be other than temporary,  and
other expenses offset by approximately $1.9 million of interest income.

11.    INCOME TAXES

       Income  (loss) from  continuing  operations  before  provision for income
taxes consists of the following:

<TABLE>
<CAPTION>
                                                              1998             1997            1996    
                                                            --------         --------         --------
                                                                            (thousands)
<S>                                                         <C>              <C>              <C>     
       United States                                        $ (1,318)        $  7,572         $ 46,075
       Foreign                                               (10,293)            (916)           3,086
                                                            --------         --------         --------

       Income (loss) from continuing operations
         before provision (benefit) for income taxes        $(11,611)        $  6,656         $ 49,161
                                                            ========         ========         ========
</TABLE>

       The components of the total consolidated  provision  (benefit) for income
taxes are summarized as follows:

<TABLE>
<CAPTION>
                                                           1998             1997              1996 
                                                         --------         --------         --------
                                                                         (thousands)
<S>                                                      <C>              <C>              <C>     
       Continuing operations                             $ 58,242         $  2,525         $ 16,669

       Discontinued operations                                 --           (1,330)         (35,129)

       Extraordinary loss on early extinguishment
         of debt                                           (1,278)         (27,400)            (765)
                                                         --------         --------         --------

       Total consolidated provision (benefit) for
         income taxes                                    $ 56,964         $(26,205)        $(19,225)
                                                         ========         ========         ========
</TABLE>

       The total consolidated provision (benefit) for income taxes is summarized
as follows:

                                   1998          1997           1996   
                                  ------        ------        ------
       Current:                               (thousands)
         Federal                  $3,391        $1,958        $  220
         State                        --         1,248           760
         Foreign                     673           498           786
                                  ------        ------        ------
             Total current         4,064         3,704         1,766
                                  ------        ------        ------

                                      F-26
<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11.    INCOME TAXES (continued)

<TABLE>
<CAPTION>
                                                       1998             1997             1996
                                                     --------         --------         --------
       Deferred:                                                     (thousands)
<S>                                                    <C>             <C>              <C>     
         Federal                                       52,951          (27,013)         (24,211)
         State                                             --           (2,662)           2,729
         Foreign                                          (51)            (234)             491
                                                     --------         --------         --------
             Total deferred                            52,900          (29,909)         (20,991)
                                                     --------         --------         --------

       Total consolidated provision (benefit)
         for income taxes                            $ 56,964         $(26,205)        $(19,225)
                                                     ========         ========         ========
</TABLE>

       The tax effect of the temporary differences that give rise to significant
deferred tax assets and liabilities are:

<TABLE>
<CAPTION>
                                                                December 31,     December 31,
                                                                    1998             1997
                                                                  --------         --------
       Deferred tax assets:                                              (thousands)
<S>                                                               <C>              <C>     
         Inventory basis differences                              $  1,366         $  1,252
         Employee benefit accruals                                  12,592            5,405
         Allowances and contingent liabilities                       9,270            3,600
         Restructuring and plant closing accruals                    4,541           14,436
         Other                                                       7,729            4,827
         Net operating loss carryforwards                           45,600           49,795
         Capital loss carryforwards                                  2,105           11,202
         Valuation allowance for deferred tax assets               (56,880)         (13,407)
                                                                  --------         --------
         Deferred tax assets                                        26,323           77,110
                                                                  --------         --------

       Deferred tax liabilities:
         Basis difference in property, plant and equipment          26,509           27,544
         Other                                                       2,879            2,282
                                                                  --------         --------
         Deferred tax liabilities                                   29,388           29,826
                                                                  --------         --------

       Net deferred tax assets (liabilities)                      $ (3,065)        $ 47,284
                                                                  ========         ========
</TABLE>

       The 1998 provision for income taxes of $57.0 million includes an increase
in valuation  allowance of $52.6  million for deferred tax assets as the Company
has determined that it will be more likely than not to have insufficient  future
income to utilize its net operating losses and realize other deferred income tax
assets.  The Company  will  continually  review the  adequacy  of the  valuation
allowance and recognize benefits only as reassessment  indicates that it is more
likely than not that the benefits will be realized. In addition, the Company did
not recognize the tax benefits associated with losses in Mexico since it appears
likely that the net operating losses will not be able to be realized in the near
future.

       During  1998,  the  valuation  allowance  for deferred tax assets and net
deferred tax assets decreased by $9.1 million  primarily due to the reduction of
capital loss carryforwards associated with the transfer of General Felt's common
stock in connection with the GFI Transaction (see Note 13). In addition,  during
1998,  deferred  tax assets were  increased by $8.7  million  associated  with a
change in the income tax basis of Foamex  Carpet.  At  December  31,  1998,  the
Company  had  approximately  $120.0  million of regular tax net  operating  loss
carryforwards for federal income tax purposes expiring from 2010 to 2012.

                                      F-27
<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11.    INCOME TAXES (continued)

       A  reconciliation  of  the  statutory  federal  income  tax  rate  to the
effective income tax rate on continuing operations is as follows:

<TABLE>
<CAPTION>
                                                                      1998             1997             1996 
                                                                    --------         --------         --------
                                                                                   (thousands)
<S>                                                                 <C>              <C>              <C>     
       Statutory income taxes                                       $ (4,064)        $  2,330         $ 17,206
       State income taxes, net of federal                                 --              260            1,864
       Limitation on the utilization of foreign tax benefits           3,800               --               --
       Valuation allowance                                            52,573               --           (3,621)
       Cost in excess of assets acquired                               1,505              553              644
       Write-off excess cost                                             770            4,305               --
       Utilization of capital loss carryforwards                          --           (5,028)              --
       Costs associated with buyout proposal                           1,750               --               --
       Other                                                           1,908              105              576
                                                                    --------         --------         --------
       Total                                                        $ 58,242         $  2,525         $ 16,669
                                                                    ========         ========         ========
</TABLE>

12.    COMMITMENTS AND CONTINGENCIES

       Operating Leases

       The Company is obligated under various noncancelable lease agreements for
rental of facilities,  vehicles and other equipment.  Many of the leases contain
renewal  options  with  varying  terms and  escalation  clauses that provide for
increased  rentals based upon increases in the Consumer Price Index, real estate
taxes  and  lessors'  operating  expenses.   Total  minimum  rental  commitments
(excluding    commitments   accrued   as   part   of   the   Company's   various
restructuring/consolidation  plans) required under operating  leases at December
31, 1998 are:

                                                 Operating
                                                   Leases   
                                                (thousands)
       1999                                       $13,130
       2000                                        10,306
       2001                                         8,708
       2002                                         7,694
       2003                                         6,586
       Thereafter                                   6,156
                                                  -------
       Total                                      $52,580
                                                  =======

       Rental expense charged to operations under operating leases  approximated
$11.1  million,  $10.1  million  and $9.6  million  for  1998,  1997  and  1996,
respectively.  Substantially  all such rental  expense  represented  the minimum
rental payments under operating leases. In addition, the Company incurred rental
expense of  approximately  $1.7  million  for 1996  under  leases  with  related
parties.

13.    RELATED PARTY TRANSACTIONS AND BALANCES

       The Company regularly enters into transactions with its affiliates in the
ordinary course of business.

       On July 1, 1997,  Trace  borrowed  $5.0 million  pursuant to a promissory
note with an aggregate principal amount of $5.0 million issued to Foamex L.P. on
June 12, 1997. The promissory note is due and payable on demand or, if no demand
is made, on July 7, 2001, and bears interest at 2 3/8% plus  three-month  LIBOR,
as defined,  per annum payable quarterly in arrears  commencing October 1, 1997.
On June 12, 1997, another promissory note issued to Foamex L.P. by Trace in July
1996 was amended.  The amended  promissory  note is an extension of a promissory
note of Trace that was due in July 1997. The aggregate  principal  amount of the
amended  promissory  note was  increased to  approximately  $4.8 million and the
maturity of the promissory note was extended. The promissory note

                                      F-28
<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.    RELATED PARTY TRANSACTIONS AND BALANCES (continued)

       is due and  payable on demand or, if no demand is made,  on July 7, 2001,
and bears  interest at 2 3/8% plus  three-month  LIBOR,  as  defined,  per annum
payable  quarterly  in  arrears.  The  promissory  note is included in the other
components  of  stockholders'  equity  (deficit).  Based  on  Trace's  financial
position, Trace may not be able to pay the aggregate amount of $9.8 million.

       The Company has current operating  receivables from Trace at December 31,
1998 of approximately $3.0 million, for which an allowance has been provided for
in  operations  as  restructuring   and  other  charges  due  to  the  financial
difficulties  of Trace  (see Note 1).  Additionally,  as  described  above,  the
Company  continues to include in the other  components of  stockholders'  equity
(deficit),  notes receivable from Trace.  During 1998, the Company also recorded
charges in other income and expense,  net of $6.5  million  associated  with the
terminated Trace buyout and related refinancing (see Note 1).

       During 1997,  the Company  purchased a $2.0 million  investment  in Trace
Global  Opportunities  Fund, which primarily  invests in companies  organized or
operating  outside the G-7 markets and is a related party to Trace. The value of
the Company's  investment in Trace Global Opportunities Fund is $0.9 million and
$2.0  million at December 31, 1998 and  December  28,  1997,  respectively.  The
change in value of this  investment  is recorded as a charge to other income and
expense.

       In connection with the Refinancing Plan in 1997,  Foamex L.P. made a cash
distribution of  approximately  $1.5 million to Trace Foam as a result of Foamex
L.P.'s  distribution to FJPS and FMXI, Inc. of the Discount  Debentures,  a note
with a principal  amount of  approximately  $56.2 million (net of  approximately
$20.6 million of original issue discount) due from FJPS and a promissory note in
the  aggregate  principal  amount  of $2.0  million  due from the  Company.  The
distribution to Trace Foam reduced retained  earnings  (accumulated  deficit) of
the Company.

       Foamex L.P. has a management  service  agreement with Trace Foam Company,
Inc. ("Trace Foam"), a wholly-owned subsidiary of Trace, pursuant to which Trace
Foam provides  general  managerial  services of a financial,  technical,  legal,
commercial,  administrative  and/or  advisory  nature to Foamex L.P. During June
1997, the management  services  agreement was amended to increase the annual fee
from $1.75 million to $3.0 million,  plus  reimbursement  of expenses  incurred.
Trace  rents  approximately   5,900  square  feet  of  general,   executive  and
administrative  office  space  in  New  York,  New  York  from  Foamex  L.P.  on
substantially the same terms as Foamex L.P. leases such space from a third party
lessor.  Also,  certain  employees  of Trace are also  employees of the Company.
Additionally,  certain employees of Trace and its affiliates provide services to
the Company.  The Company pays a portion of the salaries of such employees based
on the amount of time devoted to the Company's  matters by such employees.  Such
payments totaled approximately $2.0 million per year.

       The  Company  and  Trace  are  parties  to an  Aircraft  Sale,  Lease and
Operating Agreement concerning an aircraft owned by the Company. See Note 23.

       During 1997, the Company  purchased  approximately  $1.9 million of scrap
material from Recticel Foam Corporation ("RFC"), a former partner of Foamex L.P.
and whose chairman is a director of the Company,  under various agreements,  the
latest of which expired in March 1998.

14.    STOCK OPTION PLAN

       The  Company's  1993 Stock  Option  Plan  provides  for the  granting  of
nonqualified  ("NQSOs") and incentive stock options for up to 3.0 million shares
of common  stock to  officers  and  executive  employees  of the Company and its
subsidiaries  and affiliates,  the price and terms of each such option is at the
discretion of the Company,  except that the term cannot exceed ten years.  As of
December 28,  1997,  the stock  options  issued under the 1993 Stock Option Plan
vest equally over a five year period with a term of ten years.

                                      F-29
<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14.    STOCK OPTION PLAN (continued)

       In accordance with Statement of Financial  Accounting  Standards No. 123,
"Accounting for Stock-Based  Compensation"  ("FAS No. 123"), which was effective
as of January 1, 1996,  the fair value of option grants is estimated on the date
of grant using the  Black-Scholes  option  pricing model for pro forma  footnote
purposes  with the  following  assumptions  used for  grants  in all  years;  no
dividend yield,  risk-free  interest rates of 5.40%, 5.69% to 6.39% and expected
option life of three years.  Expected  volatility  was assumed to be 45% in 1998
and 40% in 1997 and 1996.

       A summary of stock option activity is as follows:

<TABLE>
<CAPTION>
                                             1998                      1997                      1996
                                   ------------------------   -----------------------   ------------------------
                                                   Weighted                  Weighed                    Weighted
                                                   Average                   Average                    Average
                                                   Exercise                  Exercise                   Exercise
                                      Shares       Price        Shares       Price         Shares       Price   
                                      ------       -----        ------       -----         ------       -----   
<S>                                 <C>          <C>            <C>        <C>            <C>        <C>      
Outstanding at beginning of year    1,439,049    $    7.08      967,476    $    6.97      951,343    $    7.64
Granted                               132,750        13.22      625,833        11.52      202,240         7.06
Exercised                             (82,440)        7.03     (145,195)        6.88      (14,914)        6.88
Forfeited                            (100,443)        9.84       (9,065)        6.88     (171,193)       10.80
                                   ----------    ---------   ----------    ---------   ----------    ---------
Outstanding at end of year          1,388,916    $    9.41    1,439,049    $    7.08      967,476    $    6.97
                                   ==========    =========   ==========   ==========   ==========    =========

Exercisable at end of year            549,124    $    7.02      467,460    $    7.04      431,863    $    6.94
                                   ==========    =========   ==========   ==========   ==========    =========
</TABLE>

       The options outstanding at December 31, 1998 have an exercise price range
of $6.875 to $14.00.  During 1998, the Company  granted  132,750  options with a
weighted  average market price on the date of grant of $13.22.  During 1997, the
Company granted 625,833 options with a weighted average market price on the date
of grant of $13.91.  During 1996,  the Company  granted  202,240  options with a
weighted  average market price on the date of grant of $6.52. The 1996 aggregate
difference of $1.1 million  between the fair market value ("FMV") of the options
at the date of grant and the option  price is being  charged to expense over the
vesting period (five years) of the options.  Total compensation expense relating
to options  amounted  to  approximately  $0.2  million,  $0.3  million  and $0.3
million, respectively, in each of 1998, 1997 and 1996, respectively.

       The weighted average remaining  contractual lives of outstanding  options
at December 31, 1998 was approximately 6.0 years.

       The Company applies the provisions of Accounting Principles Board Opinion
No. 25 ("Accounting for Stock Issued to Employees") and related  interpretations
("APB 25") in accounting for its stock-based  compensation  plans.  Accordingly,
compensation   expense  has  been  recognized  in  the  consolidated   financial
statements  with  respect  to the above  plans in  accordance  with APB 25.  Had
compensation  costs for the above plans been determined  based on the fair value
of the options at the grant dates under those plans  consistent with the methods
under Statement of Financial Accounting Standards No. 123 ("Accounting for Stock
Based  Compensation"),  the  Company's  income from  continuing  operations  and
earnings (loss) per share would have the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                            1998             1997           1996   
                                                              (thousands, except per share data)
       Income (loss) from continuing operations:
<S>                                                      <C>              <C>            <C>       
         As reported                                     $  (69,853)      $   4,131      $   32,492
         Pro forma                                          (70,270)          3,935          32,404

       Basic earnings (loss) per share:
         As reported                                          (2.79)           0.16            1.28
         Pro forma                                            (2.81)           0.16            1.28
</TABLE>


                                      F-30

<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14.    STOCK OPTION PLAN (continued)

                                                 1998       1997      1996   
                                              (thousands, except per share data)
       Diluted earnings (loss) per share:
         As reported                            (2.79)      0.16      1.26
         Pro forma                              (2.81)      0.15      1.26

15.    STOCKHOLDERS' EQUITY (DEFICIT)

       Preferred Stock

       The Company is authorized to issue 5.0 million shares of preferred  stock
with a par value of $1.00 per share, none of which has been issued. The Board of
Directors has the power to establish the powers, preferences, and rights of each
series which may afford the holders of any preferred stock  preferences,  powers
and rights  (including  voting  rights)  senior to the rights of the  holders of
common stock.

       Common Stock

       At December  31,  1998,  the Company had an  aggregate  of 3.0 million of
common stock shares  reserved for issuance in  connection  with its stock option
plan (1.2 million) and outstanding warrants (1.8 million).

       Warrants

       In June 1994, in connection with the issuance of the Discount Debentures,
the Company  issued  116,745  warrants to purchase 0.6 million  shares of common
stock.  Each warrant is  exercisable on or before July 1, 1999 for 5.1394 shares
at a cash price of $11.52 per share upon  exercise.  The warrants were valued by
projecting  the  Company's  financial  results for five years.  These  financial
results  were  discounted  at a rate of 18% to 20% and,  with a projected  price
earnings  ratio of 10-11x  after five  years,  yielded a value of  approximately
$25.70 per warrant or $3.0  million in total.  Accordingly,  additional  paid in
capital was increased for the cash received attributable to the warrants and the
associated  debt reduced,  with such  reduction to be amortized over the life of
the debt.

       In   addition,   the  Company  has   outstanding   warrants  to  purchase
approximately  1.2  million  shares  of  common  stock at an  exercise  price of
approximately $12.30 per share at any time prior to October 1999.

       Treasury Stock

       During 1997 and 1996, the Company purchased 434,600 and 624,700 shares of
its common stock,  respectively,  for an aggregate cost of $5.7 million and $6.3
million,  respectively,  under programs  authorized by the Board of Directors to
purchase up to 3.0 million shares of the Company's common stock.

       Accumulated Other Comprehensive Income (Loss)

       The  accumulated  other  comprehensive  income  (loss)  consists  of  the
following:

<TABLE>
<CAPTION>
                                                   December 31,     December 28,   December 26,
                                                       1998            1997            1996 
                                                     --------        --------        --------
                                                                    (thousands)
<S>                                                  <C>             <C>             <C>      
       Foreign currency translation adjustment       $(10,965)       $ (4,367)       $ (3,494)
       Additional pension liability,
         net of income taxes in 1997 and 1996         (13,756)         (2,231)         (1,445)
                                                     --------        --------        --------
                                                     $(24,721)       $ (6,598)       $ (4,939)
                                                     ========        ========        ========
</TABLE>

                                      F-31
<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

16.    OPERATING SEGMENT AND RELATED DATA

       In the fourth quarter of 1998 the Company adopted  Statement of Financial
Accounting  Standards No. 131  "Disclosure  about  Segments of an Enterprise and
Restatement  Information"  ("SFAS No. 131"). SFAS No. 131 requires  companies to
report  information  about their business  segments on the basis of how they are
managed  and  evaluated  by the  chief  operating  decision-makers.  Each of the
operating  segments is headed by an executive  vice president who is responsible
for developing plans and directing the operations of the segment.

       The Company's  reportable  business  segments are foam  products,  carpet
cushion products,  automotive products and technical products. The foam products
segment  manufactures and markets foam used by the bedding  industry,  furniture
industry  and  the  retail   industry.   The  carpet  cushion  products  segment
distributes prime, rebond, sponge rubber and felt carpet cushion. The automotive
products segment supplies foam primarily for automotive interior applications to
automotive  manufacturers and to industry sub suppliers.  The technical products
segment  manufactures and markets  reticulated  foams and other custom polyester
and  polyether  foams  for   industrial,   specialty  and  consumer  and  safety
applications.

       The  "other"  column  in  the  table  below  represents  certain  foreign
manufacturing  operations  in Mexico and Asia that do not meet the  quantitative
threshold for determining reportable segments,  corporate expenses not allocated
to other operating  segments and  restructuring  and other charges.  Total asset
information by operating  segment is not reported  because many of the Company's
facilities produce products for multiple operating  segments.  Data for 1997 and
1996 has been restated to reflect the implementation of SFAS No. 131.

       The  accounting  policies  of the  operating  segments  are  the  same as
described  in the "Summary of  Significant  Accounting  Policies"  (see Note 2).
Revenues and costs have been included in operating  segments where  specifically
identified.  Costs shared by operating segments have been allocated on the basis
of the amount utilized.

<TABLE>
<CAPTION>
                                                Carpet
                                   Foam         Cushion     Automotive      Technical
                                 Products       Products     Products        Products        Other      Total      
                                 --------       --------     --------        --------        -----      -----      
1998
<S>                              <C>          <C>            <C>              <C>          <C>        <C>       
Net sales                        $559,690     $300,791       $285,190         $79,140      $21,585    $1,246,396
Income (loss) from operations      35,313       12,005         16,788          14,571       (3,645)       75,032
Depreciation and amortization      18,300        5,529          6,424           2,929        2,203        35,385

1997
Net sales                         334,900      273,920        225,892          76,254       20,129       931,095
Income (loss) from operations      30,665        8,548         24,638          17,886      (26,637)       55,100
Depreciation and amortization      10,539        4,407          3,550           2,470        1,081        22,047

1996
Net sales                         325,067      291,338        227,151          70,325       12,470       926,351
Income (loss) from operations      32,120       18,503         28,397          17,897        4,527       101,444
Depreciation and amortization      10,935        4,450          3,127           2,484        1,357        22,353
</TABLE>

17.    ENVIRONMENTAL MATTERS

       The Company is subject to extensive and changing  federal,  state,  local
and foreign environmental laws and regulations,  including those relating to the
use, handling,  storage,  discharge and disposal of hazardous substances and the
remediation of  environmental  contamination,  and as a result,  is from time to
time involved in administrative and judicial  proceedings and inquiries relating
to  environmental  matters.  During 1998,  expenditures  in connection  with the
Company's compliance with federal,  state, local and foreign  environmental laws
and  regulations  did  not  have a  material  adverse  effect  on the  Company's
operations, financial position, capital expenditures or competitive position. As
of December 31, 1998, the Company had accruals of approximately $4.8 million for
environmental matters. During 1998, the Company established an allowance of $1.2
million relating to receivables from Trace for environmental indemnification due
to the financial difficulties of Trace.

                                      F-32
<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17.    ENVIRONMENTAL MATTERS (continued)

       The Clean Air Act Amendments of 1990 (the "1990 CAA Amendments")  provide
for the establishment of federal emission standards for hazardous air pollutants
including  methylene  chloride,  propylene oxide and TDI,  materials used in the
manufacturing  of foam. On December 27, 1996,  the United  States  Environmental
Protection Agency (the "EPA") proposed regulations under the 1990 CAA Amendments
that  will  require  manufacturers  of slab  stock  polyurethane  foam  and foam
fabrication plants to reduce emissions of methylene chloride. The final National
Emission  Standard for  Hazardous  Air  Pollutants  ("NESHAP")  was  promulgated
October 7,  1998.  NESHAP  requires  a  reduction  of  approximately  70% of the
emission  of  methylene  chloride  for the slab  stock foam  industry  effective
October 7, 2001. The Company does not believe  implementation  of the regulation
will  require  it to make  material  expenditures  due to the  Company's  use of
alternative technologies which do not utilize methylene chloride and its ability
to shift  current  production  to the  facilities  which use  these  alternative
technologies.  The 1990 CAA  Amendments  also may  result in the  imposition  of
additional   standards   regulating   air  emissions  from   polyurethane   foam
manufacturers, but these standards have not yet been proposed or promulgated.

       The Company has reported to  appropriate  state  authorities  that it has
found soil and groundwater  contamination  in excess of state standards at three
facilities and soil  contamination  in excess of state  standards at three other
facilities.  The  Company  has  begun  remediation  and  is  conducting  further
investigations  into the extent of the  contamination  at these  facilities and,
accordingly,  the extent of the remediation that may ultimately be required. The
actual cost and the timetable of any such  remediation  cannot be predicted with
any degree of certainty  at this time.  The Company has accruals of $3.3 million
for the  estimated  cost of  completing  remediation  at these  facilities.  The
Company  is  in  the  process  of  addressing  potential  contamination  at  the
Morristown,  Tennessee facility,  and has submitted a sampling plan to the State
of Tennessee.  The extent of the contamination and responsible  parties, if any,
has not yet been  determined.  A former  owner may be liable for cleanup  costs;
nevertheless, the cost of remediation, if any, is not expected to be material.

       Federal  regulations  required  that by the end of 1998  all  underground
storage tanks  ("USTs") be removed or upgraded in all states to meet  applicable
standards.  The Company has upgraded all  operating  tanks at its  facilities in
accordance  with  these  regulations  and  recently  completed  the  closure  of
remaining  USTs  at two  sites  to meet  applicable  standards.  Some  petroleum
contamination  in  soils  was  found  at one of the  sites;  the  extent  of the
contamination  is  currently  being   investigated.   The  Company  has  accrued
approximately  $0.5 million for the estimated  remediation costs associated with
this site.  However,  the full extent of  contamination,  and  accordingly,  the
actual  cost of such  remediation,  cannot  be  predicted  with  any  degree  of
certainty at this time.  Based upon the  investigation  conducted  thus far, the
Company  believes that its USTs do not pose a significant  risk of environmental
liability. However, there can be no assurances that such USTs will not result in
significant environmental liability in the future.

       On April 10,  1997,  the  Occupational  Health and Safety  Administration
promulgated new standards  governing  employee  exposure to methylene  chloride,
which  is used  as a  blowing  agent  in  some  of the  Company's  manufacturing
processes.  The Company  does not  believe  that it will be required to make any
material expenditures to comply with these new standards.

       The  Company  has been  designated  as a  Potentially  Responsible  Party
("PRP") by the EPA with respect to nine sites with an estimated  total liability
to the Company for the nine sites of less than $1.0 million.  Estimates of total
cleanup costs and fractional  allocations of liability are generally provided by
the EPA or the  committee of PRP's with respect to the  specified  site. In each
case, the liability of the Company is not considered to be material.

       Although it is possible that new information or future developments could
require the Company to reassess its potential  exposure  relating to all pending
environmental  matters,  including those described herein,  the Company believes
that,  based upon all currently  available  information,  the resolution of such
environmental  matters will not have a material  adverse effect on the Company's
operations,  financial position,  capital expenditures or competitive  position.
The possibility  exists,  however,  that new  environmental  legislation  and/or
environmental  regulations may be adopted, or other environmental conditions may
be found to exist, that may require  expenditures not currently  anticipated and
that may be material.

                                      F-33

<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

18.    LITIGATION

       Beginning  on or about  March 17,  1998,  six actions  (collectively  the
"Stockholder  Litigation")  were filed in the Court of  Chancery of the State of
Delaware,  New Castle County (the "Court"),  by stockholders of the Company. The
Stockholder  Litigation,  purportedly  brought as class actions on behalf of all
stockholders  of the  Company,  named the  Company,  certain  of its  directors,
certain of its officers,  Trace and Merger Sub as defendants  alleging that they
had breached their fiduciary duties to the plaintiffs and other  stockholders of
the Company  unaffiliated with Trace in connection with the original proposal of
Trace to acquire the publicly traded outstanding common stock of the Company for
$17.00  per  share.   The   complaints   sought,   among  other  things,   class
certification,  a declaration  that the defendants have breached their fiduciary
duties  to  the   class,   preliminary   and   permanent   injunctions   barring
implementation  of the proposed  transaction,  rescission of the  transaction if
consummated,  unspecified compensatory damages, and costs and attorneys' fees. A
stipulation  and order  consolidating  these six actions under the caption In re
Foamex International Inc.  Shareholders  Litigation,  Consolidated Civil Action,
No. 16259NC was entered by the Court on May 28, 1998.

       The parties to the  Stockholder  Litigation  entered into a Memorandum of
Understanding,  dated June 25,  1998 (the  "Memorandum  of  Understanding"),  to
settle the  Stockholder  Litigation,  subject  to,  inter alia,  execution  of a
definitive  stipulation  of  settlement  between the parties and approval by the
Court  following  notice  to  the  class  and  a  hearing.   The  Memorandum  of
Understanding  provided that as a result of, among other things, the Stockholder
Litigation and  negotiations  among counsel for the parties to the Memorandum of
Understanding,  a special meeting of stockholders would be held to vote upon and
approve the First Merger Agreement which provided,  among other things,  for the
Public Shares owned by stockholders of the Company  unaffiliated  with Trace and
its subsidiaries  (the "Public  Stockholders") to be converted into the right to
receive $18.75 in cash, without interest.

       The  Memorandum of  Understanding  also provided for  certification  of a
class, for settlement purposes only, consisting of the Public Stockholders,  the
dismissal of the  Stockholder  Litigation  with prejudice and the release by the
plaintiffs  and all members of the class of all claims and causes of action that
were or could have been asserted  against Trace,  the Company and the individual
defendants  in the  Stockholders  Litigation  or that  arise out of the  matters
alleged by plaintiffs.  Following the completion of the  confirmatory  discovery
which was provided for in the Memorandum of Understanding, on September 9, 1998,
the parties  entered into a definitive  Stipulation  of Settlement and the Court
set a hearing to consider whether the settlement  should be approved for October
27, 1998 (the "Settlement Hearing"). In connection with the proposed settlement,
the plaintiffs  intended to apply for an award of attorney's fees and litigation
expenses in an amount not to exceed $925,000,  and the defendants  agreed not to
oppose this  application.  Additionally,  the Company agreed to pay the cost, if
any,  of  sending  notice  of the  settlement  to the  Public  Stockholders.  On
September 24, 1998, a Notice of Pendency of Class Action, Proposed Settlement of
Class Action and Settlement  Hearing was mailed to the members of the settlement
class. On October 20, 1998, the parties to the Stockholder  Litigation requested
that the Court cancel the Settlement  Hearing in light of the announcement  made
by Trace on October 16,  1998,  that it had been unable to obtain the  necessary
financing for the  contemplated  acquisition  by Trace of the  Company's  common
stock at a price of  $18.75  per  share  which  was the  subject  matter  of the
proposed settlement. This request was approved by the Court on October 21, 1998,
and the Company issued a press release on October 21, 1998,  announcing that the
Court had cancelled the Settlement Hearing.

       On  November  10,  1998,  counsel for  certain of the  defendants  in the
Stockholder  Litigation  gave notice  pursuant to the  Stipulation of Settlement
that such  defendants  were  withdrawing  from the  Stipulation of Settlement in
light of the notice  given by Trace to the Company and the special  committee of
the Board of Directors on November 5, 1998 whereby  Trace  terminated  the First
Merger Agreement on the grounds that the financing condition in the First Merger
Agreement was incapable of being satisfied.

       On November 12, 1998, the plaintiffs in the Stockholder  Litigation filed
an Amended  Class  Action  Complaint  (the  "Amended  Complaint").  The  Amended
Complaint  named the  Company,  Trace,  Merger Sub, Mr.  Marshall S. Cogan,  Mr.
Andrea Farace, Dr. Stuart Hershon,  Mr. John Tunney, and Mr. Etienne Davignon as
defendants, alleging that they breached their fiduciary duties to plaintiffs and
the other Public  Stockholders  in connection  with the Second Merger,  that the
proposal  to acquire  the Public  Shares  for  $12.00  per share  lacked  entire
fairness,  that the  individual  defendants  violated  8 Del.  Code  ss.  251 in
approving  the Second Merger  Agreement,  and that Trace and Merger Sub breached
the Stipulation of Settlement.  On December 2, 1998,  plaintiffs served a motion
for a preliminary

                                      F-34
<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

18.    LITIGATION (continued)

injunction,  seeking  an Order  to  preliminarily  enjoin  the  defendants  from
proceeding with,  consummating or otherwise effecting the merger contemplated by
the Second Merger Agreement.

       The  defendants  have  denied,  and  continue  to deny,  that  they  have
committed or have  threatened to commit any violation of law or breaches of duty
to  plaintiffs  or the  purported  class or any  breach  of the  stipulation  of
settlement.   The  defendants   intend  to  vigorously  defend  the  Stockholder
Litigation. If the Stockholder Litigation is adversely determined, it could have
a material adverse effect on the financial  position,  results of operations and
cash flows of the Company.

       In addition,  on or about  November 18, 1998, a putative class action was
filed in the United States  District Court for the Eastern  District of New York
on behalf of all persons who purchased common stock of the Company between March
16, 1998 and October 19, 1998, naming Trace as defendant and alleging that Trace
breached a contract between the putative class members and Trace. By order dated
January 8, 1999, the Court  transferred the action to the United States District
Court for the Southern  District of New York. Trace made a motion to dismiss the
action on February 8, 1999,  which motion is pending  before the Court,  and the
Court has  stayed all  discovery  in the  action  until the  motion is  decided.
Neither the Company nor any of the individual directors of the Company are named
as defendants in this litigation.

       As of April  16,  1999,  the  Company  and  Trace  were  two of  multiple
defendants  in actions  filed on behalf of  approximately  4,321  recipients  of
breast  implants  in various  United  States  federal  and state  courts and one
Canadian provincial court, some of which allege substantial damages, but most of
which allege  unspecified  damages for personal injuries of various types. Three
of these cases seek to allege claims on behalf of all breast implant  recipients
or other allegedly affected parties, but no class has been approved or certified
by the court. In addition, three cases have been filed alleging claims on behalf
of approximately 39 residents of Australia,  New Zealand,  England, and Ireland.
The Company believes that the number of suits and claimants may increase. During
1995,  the Company and Trace were granted  summary  judgments  and  dismissed as
defendants  from all cases in the  federal  courts of the United  States and the
state courts of California.  Appeals for these  decisions were withdrawn and the
decisions are final.

       Although  breast  implants  do not contain  foam,  certain  silicone  gel
implants  were  produced  using  a  polyurethane  foam  covering  fabricated  by
independent  distributors  or  fabricators  from  bulk foam  purchased  from the
Company or Trace.  Neither  the Company nor Trace  recommended,  authorized,  or
approved the use of its foam for these purposes. The Company is also indemnified
by Trace for any such liabilities relating to foam manufactured prior to October
1990.  Although  Trace has paid the Company's  litigation  expenses to date from
insurance proceeds Trace received,  there can be no assurance that Trace will be
able to continue to provide  such  indemnification.  While it is not feasible to
predict or determine the outcome of these actions, based on management's present
assessment of the merits of pending claims,  after consultation with the general
counsel of Trace,  and without taking into account  indemnification  provided by
Trace, the coverage provided by Trace and the Company's  liability insurance and
potential  indemnity  from the  manufacturers  of  polyurethane  covered  breast
implants,  management  believes that the disposition of matters that are pending
or that may reasonably be anticipated to be asserted  should not have a material
adverse  effect  on either  the  Company's  or  Trace's  consolidated  financial
position or results of operations.  If management's  assessment of the Company's
liability with respect to these actions is incorrect,  such actions could have a
material  adverse  effect on the financial  position,  results of operations and
cash flows of the Company.

       On April 14, 1999, the Company received  communications  addressed to its
Board of Directors from certain of the Company's  stockholders regarding aspects
of relationships between Trace and the Company. Such stockholders questioned the
propriety of certain  relationships and related  transactions  between Trace and
the Company,  which  previously  have been  disclosed in the Company's  periodic
filings.  The Company's  Board of Directors,  in  consultation  with its special
counsel,  is in the process of evaluating such  communications and what actions,
if any, to take with respect thereto.

                                      F-35
<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

18.    LITIGATION (continued)

       In November  1997, a complaint  was filed in the United  States  District
Court for the  Southern  District of Texas  alleging  that  various  defendants,
including Crain through the use of the CARDIO(R)  process  licensed from a third
party, infringed on a patent held by plaintiff.  The Company is negotiating with
the licensor of the process for the  assumption  of the defense of the action by
the licensor, however, the action is in the preliminary stages, and there can be
no assurance as to the ultimate outcome of the action.  Such action could have a
material  adverse  effect on the financial  position,  results of operations and
cash flows of the Company.

       The Company is party to various  other  lawsuits,  both as defendant  and
plaintiff,  arising  in the  normal  course of  business.  It is the  opinion of
management that the  disposition of these lawsuits will not,  individually or in
the  aggregate,  have a material  adverse  effect on the  financial  position or
results  of  operations  of  the  Company.  If  management's  assessment  of the
Company's  liability  with respect to these actions is  incorrect,  such actions
could have a material  adverse  effect on the Company's  consolidated  financial
position.

19.    FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

       Concentration of Credit Risk

       Financial   instruments   which   potentially   subject  the  Company  to
significant  concentrations  of credit risk  consist  primarily of cash and cash
equivalents and trade accounts  receivable.  The Company maintains cash and cash
equivalents and certain other financial instruments with various large financial
institutions.  The Company's periodic evaluation of these financial institutions
are considered in the Company's investment strategy.

       The Company sells foam products to the automotive, carpet, cushioning and
other  industries.  The  Company  performs  ongoing  credit  evaluations  of its
customers  and  generally  does not require  collateral.  The Company  maintains
allowance  accounts for potential credit losses and such losses have been within
management's expectations.

       Disclosure about Fair Value of Financial Instruments

       The following  disclosures  of the estimated fair value amounts have been
determined based on the Company's assessment of available market information and
appropriate valuation methodologies.

       The estimated  fair values of the Company's  financial  instruments as of
December 31, 1998 are as follows:

                                              Carrying Amount      Fair Value
                                              ---------------      ----------
                                                        (thousands)
       Liabilities:
         Debt and debt related party              $797,423          $798,943
                                                  ========          ========

       As of April 22, 1999, the estimated fair value of the Company's financial
instrument is approximately $655.7 million.

       Carrying amounts reported in the consolidated  balance sheet for cash and
cash equivalents, accounts receivable, accounts payable, accrued liabilities and
short-term  borrowings  approximates fair value due to the short- term nature of
these instruments.

       The fair value of long-term debt is estimated using quoted market prices,
where available, or discounted cash flows.

       The fair value of any interest  rate swap is based on the amount at which
the Company would pay if any such swap was settled, as determined by an estimate
obtained from dealers.

       Fair  value  estimates  are made at a  specific  point in time,  based on
relevant market information about the financial instruments. These estimates are
subjective  in nature and  involve  uncertainties  and  matters  of  significant
judgment  and  therefore,  cannot  be  determined  with  precision.  Changes  in
assumptions could significantly affect the estimates.

                                      F-36

<PAGE>

                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

20.    EARNINGS (LOSS) PER SHARE

       The  following  table shows the amounts  used in  computing  earnings per
share and the  effect on income  and the  weighted  average  number of shares of
dilutive potential common stock.

<TABLE>
<CAPTION>
                                                              1998            1997            1996   
                                                              ----            ----            ----   
                                                              (thousands, except per share amounts)
Basic earnings (loss) per share:
<S>                                                       <C>                <C>             <C>      
       Net income (loss)                                  $   (71,770)       $(42,345)       $(83,135)
                                                          ===========        ========        ========

       Average common stock outstanding                        24,996          25,189          25,389
                                                          ===========        ========        ========

       Basic earnings (loss) per share                    $     (2.87)       $  (1.68)       $  (3.28)
                                                          ===========        ========        ========

Diluted earnings (loss) per share:
       Net income (loss) available for common stock
          and dilutive securities                         $   (71,770)       $(42,345)       $(83,135)
                                                          ===========        ========        ========

       Average common stock outstanding                        24,996          25,189          25,389

       Additional common shares resulting
          from stock options *                                     --             511             351
                                                          -----------        --------        --------

       Average common stock and dilutive
          stock outstanding                                    24,996          25,700          25,740
                                                          ===========        ========        ========

       Diluted earnings (loss) per share                  $     (2.87)       $  (1.65)       $  (3.23)
                                                          ===========        ========        ========
</TABLE>

     * Dilutive  stock options and warrants  have not been  included  since they
       would result in anti-dilutive earnings from continuing operations.

       Earnings  (loss) per share  attributable  to  continuing  operations  and
discontinued  operations and extraordinary loss on early  extinguishment of debt
are:

<TABLE>
<CAPTION>
                                                               1998        1997          1996 
                                                            --------     --------     --------  
Earnings (loss) per common share - basic:
<S>                                                         <C>          <C>          <C>     
       Continuing operations                                $  (2.79)    $   0.16     $   1.28

       Discontinued operations                                    --        (0.08)       (4.51)

       Extraordinary loss                                      (0.08)       (1.76)       (0.05)
                                                            --------     --------     --------

       Net loss                                             $  (2.87)    $  (1.68)    $  (3.28)
                                                            ========     ========     ========

Earnings (loss) per common share - assuming dilution:
       Continuing operations                                $  (2.79)    $   0.16     $   1.26

       Discontinued operations                                    --        (0.08)       (4.45)

       Extraordinary loss                                      (0.08)       (1.73)       (0.04)
                                                            --------     --------     --------

       Net loss                                             $  (2.87)    $  (1.65)    $  (3.23)
                                                            ========     ========     ========
</TABLE>

                                      F-37
<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

21.    SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                    1998          1997           1996   
                                                 --------       --------       --------
                                                               (thousands)

<S>                                              <C>            <C>            <C>     
Cash paid for interest                           $ 75,260       $ 46,323       $ 44,472
                                                 ========       ========       ========

Cash paid (received) for income taxes, net       $  2,134       $  3,579       $ (2,855)
                                                 ========       ========       ========
</TABLE>

22.    QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                       First         Second           Third
                                                      Quarter        Quarter         Quarter
                                                      -------        -------         -------
       1998 as reported:                              (thousands, except per share amounts)
<S>                                                   <C>            <C>            <C>     
         Net sales                                    $313,790       $298,479       $332,710
         Gross profit                                   51,196         56,922         56,740
         Income from continuing operations               6,208         10,491          9,640
         Net income (loss)                               4,334         10,448          9,640
         Basic earning (loss) per share from
             continuing operations                        0.25           0.42           0.39
         Diluted earnings (loss) per share from
             continuing operations                        0.24           0.40           0.37
</TABLE>

<TABLE>
<CAPTION>
                                                          First          Second          Third            Fourth
                                                         Quarter         Quarter         Quarter          Quarter
                                                         -------         -------         -------          -------
       1998 as adjusted:                                        (thousands, except per share amounts)
<S>                                                     <C>             <C>             <C>             <C>      
         Net sales                                      $ 312,290       $ 298,479       $ 332,210       $ 303,417
         Gross profit                                      49,570          57,396          52,059          (4,520)
         Income (loss) from continuing operations           4,983          10,358           4,050         (89,244)
         Net income (loss)                                  3,109          10,315           4,050         (89,244)
         Basic earning (loss) per share from
             continuing operations                           0.20            0.41            0.16           (3.57)
         Diluted earnings (loss) per share from
             continuing operations                           0.19            0.40            0.16           (3.57)
</TABLE>

       In 1998, the Company reported a loss from continuing  operations of $69.8
million.  The Company has  reviewed  year-end  adjustments  and has restated the
first,  second and third quarters for amounts  related to those quarters for all
line items where detailed  information and recently completed studies provided a
basis to correctly position the major items in the correct quarter. The majority
of the one-time charges still fall in quarter four, including categories that do
not have a basis for allocating by quarter.

       In the  fourth  quarter  of  1998,  the  Company  reported  a  loss  from
operations of $89.2 million.  Items that negatively  impacted the fourth quarter
included:  (i) additional costs of $4.5 million  associated with the integration
of Crain  and  Foamex  L.P.,  including  inventory  adjustments  for  facilities
affected by the consolidation of manufacturing  and/or distribution  facilities;
(ii) operating losses and inefficiencies of $1.0 million resulting from fires at
Orlando,   Florida  and  Cornelius,   North  Carolina  plants;  (iii)  operating
inefficiencies  and logistics costs of $2.5 million associated with the sales of
juvenile  and other  consumer  products  sold  through  mass  merchandisers  and
discount  stores;  (iv)  start  up  costs  and  inefficiencies  of $3.0  million
associated   with  new  automotive   lamination   contracts  at  Mexican  border
facilities;  (v) increased  provisions  for bad debts of $3.0 million for United
States and Mexican  customers;  and (vi)  competitive  pricing  measures  due to
market share challenges from  competitors for its foam and automotive  products.
In addition,  the Company provided a valuation allowance of $52.6 million on its
deferred tax assets (see Note 11).

                                      F-38
<PAGE>
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

22.    QUARTERLY FINANCIAL DATA (UNAUDITED) (continued)

<TABLE>
<CAPTION>
                                                          First         Second             Third          Fourth
                                                         Quarter        Quarter           Quarter         Quarter
                                                         -------        -------           -------         -------
       1997                                                     (thousands, except per share amounts)
<S>                                                     <C>             <C>              <C>             <C>      
         Net sales                                      $ 229,120       $ 239,887        $ 233,434       $ 228,654
         Gross profit                                      42,797          44,780           38,039          17,723
         Income (loss) from continuing operations           8,136           9,470            6,515         (19,990)
         Net income (loss)                                  7,726         (32,719)           6,515         (23,867)
         Basic earnings (loss) per share from
             continuing operations                           0.32            0.37             0.26           (0.80)
         Diluted earnings (loss) per share from
             continuing operations                           0.31            0.37             0.26           (0.80)
</TABLE>

       During  1997,  the Company  recorded an  extraordinary  loss on the early
extinguishment  of debt of  approximately  $42.2  million  relating  to the 1997
Refinancing  Plan (see Note 7) which is reflected in the second quarter of 1997.
During  the  fourth  quarter  of 1997,  the  Company  recorded  a $21.1  million
restructuring  charge which is  described  in Note 4 and recorded  approximately
$20.0 million of special charges and changes in estimates  relating to inventory
writedowns,  customer deductions,  start-up of operations and other items. These
charges decreased gross profit by $15.6 million and increased  selling,  general
and administrative expenses by $4.4 million.

23.      SUBSEQUENT EVENTS

       On March 16,  1999,  the  Company  announced  that it had  hired  John G.
Johnson,  Jr. as President,  Chief Executive Officer and director of the Company
following the resignation of Andrea Farace from the positions of Chairman of the
Board,  Chief  Executive  Officer and director of the Company.  The Company also
announced that it had hired JP Morgan  Securities Inc. as a financial advisor to
explore strategic alternatives to maximize shareholder value.

       On March 31,  1999,  the Company  sold its  corporate  airplane for $16.3
million  in  gross  proceeds  of which  $8.9  million  was  used to  repay  debt
associated  with the airplane.  As specified by the terms of the Aircraft  Sale,
Lease and  Operating  Agreement,  pursuant  to which the Company  purchased  the
airplane,  Trace agreed to reimburse  the Company to the extent the net proceeds
from the sale of the airplane were less than a specified amount, and the Company
was obligated to share the net proceeds in excess of such specified  amount with
Trace. Pursuant to the terms of such agreement, the Company was obligated to pay
Trace  approximately $0.6 million or approximately 50% of the "Excess Proceeds",
as defined,  which was offset against Trace's  obligation to pay interest on two
promissory notes in favor of the Company.

       Effective  January  25,  1999,  employees  of  Trace  and its  affiliates
referred to in Note 13,  entered  into  employment  agreements  with the Company
totaling $2.0 million  annually.  The agreements  have  continuous  terms of two
years.

                                      F-39
<PAGE>

                            FOAMEX INTERNATIONAL INC.
                     INDEX TO FINANCIAL STATEMENT SCHEDULES


       Index to Financial Statement Schedules

       Schedule I - Condensed Financial Information of Registrant

       Schedule II - Valuation and Qualifying Accounts

       All other  schedules  are omitted since the required  information  is not
present or is not present in amounts  sufficient  to require  submission  of the
schedule,  or because the information  required is included in the  consolidated
financial statements and notes thereto.








                                      S-1

<PAGE>
                                                                      Schedule I

                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                       December 31,       December 28,
                                                                           1998               1997       
                                                                        ---------         ---------
ASSETS                                                                          (thousands)
CURRENT ASSETS:
<S>                                                                     <C>               <C>      
    Cash and cash equivalents                                           $     187         $   2,639
    Intercompany receivables                                                4,623            14,542
    Deferred income taxes                                                      --            15,975
    Other current assets                                                      584               181
                                                                        ---------         ---------
            Total current assets                                            5,394            33,337

DEFERRED TAXES                                                                 --            26,960

OTHER ASSETS                                                                1,078             2,252
                                                                        ---------         ---------

TOTAL ASSETS                                                            $   6,472         $  62,549
                                                                        =========         =========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
    Accounts payable                                                    $      --         $  10,542
    Other accrued liabilities                                               6,486             5,056
                                                                        ---------         ---------
      Total current liabilities                                             6,486            15,598

LONG-TERM LIABILITIES:
    Notes payable to consolidated subsidiaries                              4,990             2,500
    Tax distribution advance payable                                       13,618            13,618
    Deficit in consolidated subsidiaries                                  183,082           142,772
    Deferred income taxes                                                     976                --
    Other liabilities                                                       1,439             1,480
                                                                        ---------         ---------
      Total liabilities                                                   210,591           175,968
                                                                        ---------         ---------

COMMITMENTS AND CONTINGENCIES                                                  --                --
                                                                        ---------         ---------

STOCKHOLDERS' EQUITY (DEFICIT):
    Preferred Stock, par value $1.00 per share:
      Authorized 5,000,000 shares - none issued                                --                --
    Common Stock, par value $.01 per share:
      Authorized 50,000,000 shares
      Issued 27,005,752 and 26,908,680 shares, respectively
      Outstanding 25,016,752 and 24,919,680 shares, respectively              270               269
    Additional paid-in capital                                             86,990            86,025
    Retained earnings (accumulated deficit)                              (237,661)         (164,118)
    Accumulated other comprehensive income (loss)                         (24,721)           (6,598)
    Other:
      Common Stock held in Treasury, at cost:
        1,989,000 shares                                                  (19,202)          (19,202)
      Shareholder note receivable                                          (9,795)           (9,795)
                                                                        ---------         ---------
      Total stockholders' equity (deficit)                               (204,119)         (113,419)
                                                                        ---------         ---------

      TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)              $   6,472         $  62,549
                                                                        =========         =========
</TABLE>

    During 1997, FJGP, Inc., a wholly owned subsidiary of Foamex  International,
    effectively  distributed its assets and liabilities to Foamex International.
    FJGP Inc.'s assets  primarily  consisted of its 1%  partnership  interest in
    FJPS and a $6.0 million demand note due from Foamex International.

                 See notes to consolidated financial statements.
                                   (continued)

                                      S-2
<PAGE>
                                                                      Schedule I

                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                            STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                  1998              1997              1996    
                                               ---------         ---------         ---------
                                              (amounts in thousands except per share amounts)
<S>                                            <C>               <C>               <C>      
INTERCOMPANY SALES                             $  12,619         $ 123,355         $ 179,791

COST OF GOODS SOLD                                12,619           123,355           179,791
                                               ---------         ---------         ---------

GROSS PROFIT                                          --                --                --

SELLING, GENERAL AND
    ADMINISTRATIVE EXPENSES                         (183)              486               709

RESTRUCTURING AND OTHER CHARGES                       --                --              (126)
                                               ---------         ---------         ---------

INCOME (LOSS) FROM OPERATIONS                        183              (486)             (583)

EQUITY IN EARNINGS (LOSS) OF
    CONSOLIDATED SUBSIDIARIES                    (18,260)            4,954            42,097

INTEREST EXPENSE                                   2,237               153               196

OTHER INCOME (EXPENSE)                            (7,326)              204                78
                                               ---------         ---------         ---------

INCOME (LOSS) BEFORE INCOME TAX
    AND EXTRAORDINARY LOSS                       (27,640)            4,519            41,396

INCOME TAX PROVISION (BENEFIT)                    42,213               388             8,904
                                               ---------         ---------         ---------

INCOME (LOSS) FROM CONTINUING
    OPERATIONS                                   (69,853)            4,131            32,492

EQUITY IN DISCONTINUED OPERATIONS                     --            (1,994)         (114,480)
                                               ---------         ---------         ---------

INCOME (LOSS) BEFORE EXTRAORDINARY LOSS          (69,853)            2,137           (81,988)

EQUITY IN EXTRAORDINARY LOSS                      (1,917)          (44,482)           (1,147)
                                               ---------         ---------         ---------

NET INCOME (LOSS)                              $ (71,770)        $ (42,345)        $ (83,135)
                                               =========         =========         =========

BASIC EARNINGS (LOSS) PER SHARE:
    CONTINUING OPERATIONS                      $   (2.79)        $    0.16         $    1.28
                                               =========         =========         =========
    EARNINGS (LOSS) PER SHARE                  $   (2.87)        $   (1.68)        $   (3.28)
                                               =========         =========         =========

DILUTED EARNINGS (LOSS) PER SHARE:
    CONTINUING OPERATIONS                      $   (2.79)        $    0.16         $    1.26
                                               =========         =========         =========
    EARNINGS (LOSS) PER SHARE                  $   (2.87)        $   (1.65)        $   (3.23)
                                               =========         =========         =========
</TABLE>

       Equity in discontinued  operation  includes allocated income tax benefits
       of Foamex  International  of $1.3 million and $32.5  million for 1997 and
       1996, respectively.

       Equity in  extraordinary  loss includes  allocated income tax benefits of
       $1.9  million,  $27.3  million and $0.8 million for 1998,  1997 and 1996,
       respectively.

                 See notes to consolidated financial statements.
                                   (continued)

                                      S-3
<PAGE>
                                                                      Schedule I
                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                            1998              1997              1996 
                                                                         ---------         ---------         ---------
OPERATING ACTIVITIES:                                                                     (thousands)
<S>                                                                      <C>               <C>               <C>       
    Net income (loss)                                                    $ (71,770)        $ (42,345)        $ (83,135)
    Adjustments to reconcile net income (loss) to
      net cash provided by operating activities:
      Deferred income taxes                                                 45,189              (387)            8,904
      Equity in discontinued operations                                         --             1,994           114,480
      Equity in extraordinary loss                                           1,917            44,482             1,147
      Equity in (earnings)/losses of consolidated subsidiaries              18,260            (4,954)          (42,097)
      Other                                                                  1,253                61               357
    Changes in operating assets and liabilities,
      net of acquisitions:
      Intercompany receivables                                               9,919            (4,026)            2,702
      Accounts payable                                                     (10,542)            1,233            (3,844)
      Other assets and liabilities                                           1,189               764             4,346
                                                                         ---------         ---------         ---------
         Net cash provided by (used for) operating activities               (4,585)           (3,178)            2,860
                                                                         ---------         ---------         ---------

INVESTING ACTIVITIES:
    Investment in consolidated subsidiaries                                (20,000)               --                --
    Proceeds from (settlement of) sale of discontinued operations               --           (13,556)              179
    Distribution from subsidiaries                                          20,293             8,757             1,707
    Other                                                                       --            (2,000)               --
                                                                         ---------         ---------         ---------
    Net cash provided by (used for) investing activities                       293            (6,799)            1,886
                                                                         ---------         ---------         ---------

FINANCING ACTIVITIES:
    Note payable to consolidated subsidiary                                  2,490             2,500                --
    Dividend payments                                                       (1,245)               --                --
    Tax advance distribution                                                    --            13,618                --
    Purchase of treasury stock                                                  --            (5,739)           (6,296)
    Proceeds from exercise of stock options                                    595             1,005               102
                                                                         ---------         ---------         ---------
         Net cash provided by (used for) financing activities                1,840            11,384            (6,194)
                                                                         ---------         ---------         ---------

NET INCREASE (DECREASE) IN CASH AND
    CASH EQUIVALENTS                                                        (2,452)            1,407            (1,448)

CASH AND CASH EQUIVALENTS AT
    BEGINNING OF PERIOD                                                      2,639             1,232             2,680
                                                                         ---------         ---------         ---------

CASH AND CASH EQUIVALENTS AT
    END OF PERIOD                                                        $     187         $   2,639         $   1,232
                                                                         =========         =========         =========
</TABLE>


Note:  During 1998, 1997 and 1996, the Company received  distributions  from its
       consolidated subsidiaries of $0.3 million, $8.8 million and $1.7 million,
       respectively, in accordance with tax sharing agreements.

                 See notes to consolidated financial statements.
                                   (continued)

                                      S-4
<PAGE>
                                                                     Schedule II

                   FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS
                                   (thousands)

<TABLE>
<CAPTION>
                                          Balance at     Charged to       Charged to                     Balance at
                                         Beginning of    Costs and          other                          End of
                                            Period       Expenses         Accounts          Deductions    Period  
YEAR ENDED DECEMBER 31, 1998
<S>                                        <C>         <C>               <C>                <C>           <C>    
Allowance for Uncollectible Accounts       $ 6,844     $       2,611     $    2,500(1)      $   2,165     $ 9,790
                                           =======     =============     ==========         =========     =======

Reserve for Discounts                      $ 1,238     $          --     $   12,516(1)      $  11,914     $ 1,840
                                           =======     =============     ==========         =========     =======

Deferred Tax Asset Valuation Allowance     $13,407     $      52,573     $   (9,100)        $      --     $56,880
                                           =======     =============     ==========         =========     =======


YEAR ENDED DECEMBER 28, 1997
Allowance for Uncollectible Accounts       $ 3,060     $       2,295     $    2,898         $   1,409     $ 6,844
                                           =======     =============     ==========         =========     =======

Reserve for Discounts                      $ 3,268     $          --     $   10,182(1)      $  12,212     $ 1,238
                                           =======     =============     ==========         =========     =======

Deferred Tax Asset Valuation Allowance     $23,064     $      (5,028)    $   (1,863)(3)     $   2,766     $13,407
                                           =======     =============     ==========         =========     =======


YEAR ENDED DECEMBER 29, 1996
Allowance for Uncollectible Accounts       $ 4,839     $         704     $      292         $   2,775     $ 3,060
                                           =======     =============     ==========         =========     =======

Reserve for Discounts                      $ 4,299     $          --     $   12,190         $  13,221     $ 3,268
                                           =======     =============     ==========         =========     =======

Deferred Tax Asset Valuation Allowance     $16,979     $      12,940     $   (6,855)(3)     $      --     $23,064
                                           =======     =============     ==========         =========     =======
</TABLE>

(1)    Adjustments reflect a reduction in net sales.

(2)    Represents  an  adjustment  to  reflect  the  distribution  of  valuation
       reserves  for  deferred  tax assets to Trace in  connection  with the GFI
       Transaction (see Note 1).

(3)    Represents an adjustment to cost in excess of net assets  relating to the
       utilization of preacquisition deferred tax assets of General Felt.


                                      S-5