1998 ANNUAL REPORT

                                     [LOGO]

                                   BONTEX (R)

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                                    CONTENTS

                                [Logo] BONTEX (R)

                         Consolidated 1998 Annual Report


2    Mission Statement, Corporate and       6    Management's Discussion and
     Product Profile                             Analysis

3    Message to Shareholders               11    Financial Statements and Notes

5    Financial Highlights                  26    Independent Auditors' Report


                              CORPORATE HIGHLIGHTS

1946     Bontex was originally established as a leather processing operation in
         Newark, New Jersey.

1954     Bontex elastomeric wet web cellulose materials were first produced in
         Buena Vista, Virginia.

1959     Bontex goes public with stock issuance and listing on NASDAQ stock
         market.

1969     Bontex begins Bontex SA investment in Belgium, then and today, the
         world's largest and most efficient factory manufacturing elastomeric
         wet web fiberboard products.

1982     Bontex sales surpass $30 million, and operating profits exceed $3.2
         million. Bontex begins specification marketing program to expand sales
         globally.

1986     Bontex establishes a base of operations in Italy, as Bontex Italia
         begins sales, marketing, and converting operations.


1990     Bontex sales exceed $40 million.

1992     Bontex enters strategic partnership to market polyurethane foams.

1995     Bontex sales exceed $50 million. Bontex establishes Bontex de Mexico to
         expand export sales.

1996     The Company restructures and officially operates globally as Bontex,
         Inc., formerly Georgia Bonded Fibers, Inc.

1997     Bontex export sales from USA exceed $10 million. Bontex establishes
         Bontex Hong Kong to further expand export sales. Bontex enters into a
         key strategic partnership to market nonwoven materials. Bontex becomes
         the first global manufacturer in our industry to be ISO 9001 certified.

1998     Bontex Stock transferred to NASDAQ SmallCap Market.

                                       1

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                                MISSION STATEMENT

     Our Mission is to be the global leader in the markets we serve, by
providing customers with world class quality products and service.

                                CORPORATE PROFILE

     Bontex, Inc. was originally founded in June 1946 under the laws of the
State of New Jersey. The Company originally began as a leather processing
operation, and today, Bontex is a leading worldwide manufacturer and distributor
of uncoated and coated elastomeric wet web impregnated fiberboard products,
generally described by the trademark BONTEX(R). BONTEX(R) is primarily used as
an insole material in footwear, as well as visorboard in headwear, dielectric
sealing base in automotive door panels, backing substrate, stiffener and
laminating base in luggage, leathergoods, and allied products. All BONTEX(R)


<PAGE>


fiberboard products are designed to be "environmentally-friendly," because
Bontex uses recycled and primary cellulose fibers originally derived from trees,
a renewable resource.

     The Company maintains global headquarters, manufacturing and converting
facilities at Bontex USA, One Bontex Drive, Buena Vista, Virginia; European
headquarters and manufacturing at Bontex S.A., Stembert, Belgium; a distribution
and converting operation at Bontex Italia S.r.l., Villafranca, Verona, Italy;
and distribution subsidiaries at Bontex de Mexico, S.A. de C.V., in Leon, Mexico
and Bontex Hong Kong R.O.C. Bontex also maintains a network of liaison offices
and distributors globally to market Bontex products.


                                 PRODUCT PROFILE

     Bontex manufactures uncoated and coated BONTEX(R) fiberboard products;
breathable cushion foams, that are marketed under the trademarks BON-FOAM(R),
MAXXON(R) and SURE-FOAM(R), and are sold in a variety of grades for use as shock
absorbing insole material; BON-PEL(R), a wet web nonwoven substrate, which is
exceptionally strong and flexible; BONTEX(R) 48 MA, an uncoated visorboard for
use in military headwear, which has been approved by NATICK military laboratory.
Bontex also combines certain products, such as foams, fabrics, and vinyls, with
BONTEX(R) fiberboard. Additionally, Bontex is the exclusive distributor globally
to the footwear industry of an expanded polyurethane material manufactured by
Aearo Company-E.A.R. Specialty Composites, trademarked MAXXON(R) LS and
CONFOR(R). Bontex also markets to the footwear industry a range of nonwoven
products under the Company's trademark BON-STITCH(R), primarily used for various
stitch construction footwear. Registered trademarks under which the Company
markets products include:

BONTEX(R)             SUPERTEX(R)               BON-PEL(R) nonwoven
MORI-FLEX(R)          BON-FOAM(R) cushion       BON-STITCH(R)
MAXXON(R) cushion     VINTEX(R)                 SUR-V-LON(R) vinyl coated Bontex
BON-DOE(R)            SIR-PEL(R)                BONTEX(R) 200 RECYCLED
MORIMER(R)            SURTEX(R)                 BONTEX(R) 300 RECYCLED
CONTOUR(R)

                                       2
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                            MESSAGE TO SHAREHOLDERS

[Logo] BONTEX (R)
ONE BONTEX DRIVE
BUENA VISTA, VIRGINIA 24416-1500
email: 74313.2761@compuserve.com
http://www.bontex.com

Dear Fellow Shareholder:

In my letter last year, I reported to you our record sales and profits. However,
what follows in this letter is quite different, as fiscal 1998 was overshadowed
by unprecedented challenges. My letter not only details the results from a
difficult year, but more importantly, outlines a number of essential measures
which have been implemented to increase our sales and return the Company to
profitability.

We are not pleased with our operating results. Bontex, Inc. and its subsidiaries
recorded consolidated net sales of $43.5 million, a decrease of $6.9 million or
13.6 percent, as compared to the $50.3 million last year, and consolidated
operating profits declined from $4.0 million to $500,000. Consolidated net
income fluctuated from a record profit of $1.7 million or $1.10 per share to a
consolidated net loss of $(446,000) or $(.28) per share.

The largest issues impacting Bontex in fiscal 1998, in addition to the effects
of the highly competitive environment in which the Company operates, were the
financial situation in Asia, the well publicized slow-down in athletic footwear
sales, and higher operating costs. Also contributing to the decline in sales was
the unfavorable currency translation adjustment resulting from the increase in
the value of the U.S. dollar that reduced sales by $3.0 million or 6.0 percent,
which represents almost half of the overall sales decline.

The financial situation in Asia relates to the recent currency and economic
crisis. During the past twelve months, the currencies of a number of key Asian
countries, including Korea, Indonesia, and Thailand, have devalued, resulting in
a sudden economic slowdown in this region. Asia is the largest market for Bontex
products, as almost 70 percent of the world's footwear is manufactured in Asia.
Over the previous three years, approximately one-third of the Company's
consolidated sales were derived from customers in the Asian region. The overall
strength of the U.S. dollar and the currency devaluations in Asia have resulted
in additional pressure on earnings. Accordingly, the deteriorating situa tion in
Asia has had a negative impact on the Company's operations. However, even though
economic conditions in Asia have reduced our near-term growth expectations,
management is confident that the market ultimately will rebound. We intend to
use the current situation to refocus a number of our key sales strategies.

Sales to the athletic footwear segment, which is the largest footwear market
globally, have declined considerably. This decline, as well as the relatively
mild winter caused by the El Nino phenomenon, impacted sales negatively for
boots and other footwear. Excessive worldwide inventory levels of finished
goods, and a fundamental shift in consumer trends away from athletic footwear
toward the brown shoe style, continue to put pressure on our current sales, as
does the increased usage of nonwoven materials.

Higher operating costs relate mainly to a number of non-recurring issues for the
domestic operations of Bontex, Inc. Specifically, the largest increases were in
professional fees, recruiting, compensation and marketing costs. The Company had
increased certain marketing costs in an effort to increase sales, which have
subsequently been curtailed until conditions warrant a change. A portion of the
higher compensation costs relates to recruiting costs for restructuring and
other non-recurring compensatory charges.

Rather than continue to dwell on the aforementioned negative items, it is more
important to report to you the various measures implemented by management to
return your Company to profitability. To that end, we have adopted a dual
focused approach comprised of a definitive Sales Action Plan and an austere Cost
Reduction Program. To increase our sales, which should ultimately lead to
increased profits, we have three primary sales strategies of our Sales Action
Plan: expand the Bontex product line, augment our operating base in Asia, and
refine our global marketing approach to expand sales in a number of key markets.
Our Cost Reduction Program consists of a number of critical steps to reduce our
cost structure, especially in the area of raw material cost and capacity issues.


                                       3

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The Company is moving aggressively on all fronts in an attempt to increase sales
without compromising our margins. Last year, the Company successfully launched
the Bon-Stitch nonwoven product line. Our new Bon-Stitch nonwoven products
represent an important strategy in recovering some of the Bontex elastomeric
fiberboard sales that have been lost to nonwovens. Our strategic alliance
program for nonwoven products is being expanded in an effort to further leverage
our Bontex trademark and to better serve a larger spectrum of customers. Further
to these product strategies for nonwovens, the Company continues to innovate and
improve existing Bontex products to enhance performance and reduce costs.
Substantial progress was made last year in improving the formulation of our
materials, the effects of which we hope will be more evident next year. We also
are exploring new cushion materials and composite products to add value,
compliment a more balanced product mix, and improve our market position as a
leader in cushion insole technologies.

During fiscal 1998, the Company continued to improve production through the
development of one of the most efficient and highest capacity facilities in the
world producing elastomeric wet web cellulose fiberboard products. Our increased
capacity at Bontex S.A. in Europe represents more than half of all the capacity
of the six machines of our primary competitor, based on published information.
The return on investment of this strategy is expected to enable Bontex to
achieve greater production efficiencies and maintain stricter controls over
quality, while at the same time, allowing Bontex to remain a dual source
company.

Bontex continues its plan to restructure and sell our Newark facility in an
effort to reduce overhead related costs. We currently expect to use the proceeds
of the sale to reduce our borrowings. The level of sales in the Northeast region
of the U.S. does not justify this level of overhead. Our financial plan includes
a number of other important measures to increase working capital, reduce debt,
and invest judiciously in essential capital projects.

Bontex remains focused on our mission to be the global leader in all markets we
service, as demonstrated by our ISO 9001 certified quality assurance systems at
all manufacturing facilities. The Bontex Global Network consists of our
manufacturing facilities, converting facilities, and sales and distribution
centers. The Bontex trademark has an especially high name recognition in the
industries we serve globally.

Another important development in 1998 pertained to the listing of the Company's
common stock on the NASDAQ market. The Company's common stock did not comply
with the Nasdaq Stock Market's new market value of public float requirements
which became effective February 23, 1998. This situation is primarily due to the
fact that the common stock of Bontex is thinly traded, and our public float is
well below fifty percent of the outstanding shares. Bontex transferred its
common stock listing to The Nasdaq SmallCap on July 23, 1998, where it now
trades under the symbol BOTX.

There were a number of notable accounting and administrative related matters
during 1998. The Company has adopted FASB 130, Reporting Comprehensive Income,
which has resulted in the reporting of other comprehensive income in the income
statement. The Company also is taking appropriate steps to address operating
issues relating to the Year 2000 issues as well as the scheduled conversion of
the European economic and monetary union (EMU) to the euro.

We greatly appreciate the continued support of our shareholders during this
difficult period, and we also express our sincere thanks to our employees,
agents, distributors globally, as well as our customers for their trust placed
in Bontex.



/s/James C. Kostelni
--------------------
James C. Kostelni
Chairman of the Board and
Chief Executive Officer



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





           Bontex, Inc., One Bontex Drive, Buena Vista, VA 24416-1500
      Telephone: (540)261-2181 Fax: (540)261-3784 Email: bontex@bontex.com
                              http://www.bontex.com
 Bontex SA (Belgium), Bontex S.r.l. (Italy), Bontex Hong Kong, Bontex de Mexico

                                       4
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                          BONTEX, INC. AND SUBSIDIARIES
                        Summary of Selected Ten Year Data
                (In Thousands, Except Per Share Data and Ratios)

<TABLE>
<CAPTION>

                                                   Years ended June 30,
                            1998       1997        1996        1995       1994      1993      1992      1991       1990       1989
                          --------   --------    -------    -------   ---------   -------   -------   -------    -------    -------
<S>     <C>    <C>    <C>    <C>    <C>    <C>
Net sales                 $ 43,483   $ 50,333    $47,618    $50,998   $  47,729   $46,710   $46,534   $44,734    $41,223    $39,676
                          ========   ========    =======    =======   =========   =======   =======   =======    =======    =======

Income (loss) before
  extraordinary item and
  cumulative effect of
  change in accounting
  principles              $   (446)  $  1,733    $  (602)   $(1,458)  $     935  $    193   $   942    $  212     $  167     $  143
Extraordinary item               -          -          -          -           -         -         -         -          -        212
Cumulative effect of
   change in accounting
   principles                    -          -          -          -         400         -         -        99          -          -
                          --------   --------    -------    -------   ---------   -------   -------   -------    -------    -------
Net income (loss)         $   (446)  $  1,733    $  (602)   $(1,458)  $   1,335  $    193   $   942   $   311    $   167    $   355
                          --------   --------    -------    -------   ---------   -------   -------   -------    -------    -------

Income (loss) per share:
Before extraordinary item
  and cumulative effect of
   change in accounting
   principles             $   (.28)  $   1.10    $  (.38)   $  (.93)  $     .60  $    .12   $   .60   $   .14    $   .11    $   .09
Extraordinary item               -          -          -          -           -         -         -         -          -        .14
Cumulative effect of change
   in accounting principles      -          -          -          -         .25         -         -       .06          -          -
                          --------   --------    -------    -------   ---------   -------   -------   -------    -------    -------

Net income (loss)         $   (.28)  $   1.10    $  (.38)   $  (.93)  $     .85  $    .12   $   .60   $   .20    $   .11    $   .23
                          --------   --------    -------    -------   ---------   -------   -------   -------    -------    -------


Total assets              $ 32,513   $ 32,906   $ 33,181   $ 39,527   $  31,032  $ 28,840  $ 28,669   $22,753    $21,547    $20,598
Total  stockholders'
  equity                  $ 10,891   $ 11,515   $ 10,308   $ 11,186   $  12,080  $ 10,521  $ 10,825   $ 9,313    $ 9,254    $ 8,758
Capital expenditures      $  2,334   $  2,389   $  2,157   $  1,704   $   1,868  $  1,226  $  1,787   $ 1,591    $ 1,407    $   642
Cash flows provided by
  (used in) operating
   activities             $     57   $  3,037   $  1,180   $ (2,073)  $   1.078  $   (122) $    215   $ 2,024    $    30    $   792
Long-term debt            $  2,256   $  2,761   $  2,330   $  1,364   $   1,511  $  1,056  $  1,493   $   964    $   193    $   361
Book value per share      $   6.92   $   7.32   $   6.55   $   7.11   $    7.68  $   6.69  $   6.88   $  5.92    $  5.88    $  5.57
Cash dividends
  declared per
  common share *          $      -   $      -   $      -   $      -   $       -  $    .05  $      -   $     -    $   .10    $     -
Current ratio                 1.05       1.16       1.06       1.07        1.30      1.26      1.34      1.43       1.46       1.53
Total debt to equity
  ratio                       1.99       1.86       2.22       2.53        1.57      1.74      1.65       1.44      1.33       1.35
Capital structure         $ 13,791   $ 14,570   $ 12,819   $ 12,703   $  14,162  $ 12,224  $ 12,991   $ 10,950   $10,146    $ 9,750

</TABLE>


*A cash dividend of $.05 and $.10 was paid during the second quarter of 1993 and
1990 respectively.

                         Common Stock and Dividend Data

       The stock of Bontex, Inc. was previously traded over the counter on the
Nasdaq National Market. Effective July 23, 1998, the stock of Bontex, Inc. was
listed on the Nasdaq SmallCap Market under the symbol BOTX. At September 14,
1998 there were approximately 429 shareholders of record. No cash dividends were
declared or paid during fiscal years 1994 through 1998.
<TABLE>
<CAPTION>

                               1998                    1997                 1996                   1995                 1994
                           ----------------      ----------------      ----------------      ----------------     ----------------
                            High        Low       High        Low       High        Low       High       Low       High        Low
                           -----      -----      -----      -----      -----      -----      -----      -----     -----      -----
<S>     <C>    <C>    <C>    <C>    <C>    <C>
First Quarter              $9.63      $4.25      $4.00      $3.13      $4.25      $2.75      $6.00      $5.00     $4.75      $3.75
Second Quarter              8.50       4.50       5.13       3.50       3.88       2.38       6.50       5.50      5.25       4.50
Third Quarter               5.25       3.25       5.38       4.50       3.25       2.38       5.50       3.50      5.25       4.25
Fourth Quarter              4.25       2.88       5.00       4.25       4.38       2.88       4.13       2.98      5.50       4.50
</TABLE>




                                       5
<PAGE>




                      Bontex, Incorporated and Subsidiaries

                      Management's Discussion and Analysis


                                     GENERAL

As noted in our Message to Shareholders, Bontex continues to address competitive
pressures and economic conditions globally that can, and in some cases have
already, negatively impacted sales volume and profitability. Fiscal year 1998
was dominated by the Asian crisis and major retrenchment of the athletic
footwear industry resulting in a loss of the momentum established by Bontex in
1997. The Company's losses and the examination of industry trends urge us to
intensify our efforts to develop new areas for sales and further reduce costs.
Overall, the stability in raw materials prices and general inflation partially
mitigated the effects of decreased sales volume.

The Company's consolidated financial statements and notes to the consolidated
financial statements should be read as an integral part of this review. Except
for the historical data set forth herein, the following discussion contains
certain forward-looking information. Forward-looking information is only an
estimate of what may occur because of its dependence on model characteristics
and assumptions. As a result, actual future gains and losses will differ,
perhaps materially, from those reported in the disclosures. Factors that could
cause or contribute to such differences include, but are not limited to, level
of sales to key customers, actions of competitors, fluctuations in the prices of
primary raw materials and foreign exchange rates.


                             RESULTS OF OPERATIONS

Bontex had reduced sales of $6.9 million or 13.6 percent in 1998 as compared to
fiscal year 1997, of which currency exchange fluctuations represented a $3.0
million translation decrease on sales as compared to a $2.0 million translation
decrease in the prior year. The inherent volume sensitivity of the Company makes
it difficult to overcome such sudden decreases in our level of sales as was
experienced in 1998. Management expects continued pressure on our profit margins
as a result of competition and reduced sales volume even though prices of our
primary raw materials are expected to remain relatively stable. Most experts are
predicting a two-year period of adjustment in the athletic shoe business, due
largely to an over supply of shoes. Bontex's results of operations may continue
to be negatively affected during this adjustment period and beyond.

Consolidated net sales were $43.5, $50.3, and $47.6 million for fiscal years
1998, 1997, and 1996, respectively. The growth experienced in 1997 reflected the
positive impact of the Company's marketing program to maintain higher selling
prices and develop new sales. This success was offset in 1998 by lower selling
prices due to competitive pressures and the loss of sales volume noted in the
General section above. Cost of sales were 71.5 percent of net sales in 1998, 68
percent in 1997 and 77.1 percent in 1996. The increase in costs as a percentage
of sales from 1997 to 1998 was mainly due to lower sales volume and reduced
selling prices, as well as a slight increase in the cost of raw materials. The
decline in costs of sales from 1996 to 1997 was due to the decline of raw
materials prices from very high levels in 1996.

Bontex continues to hold a strong position in the footwear industry and expects
to recover as global shoe inventories are corrected. However, nonwoven materials
continue to erode sales of cellulose based products for shoe insoles. Bontex is
developing literature to better inform the market on the benefits of cellulose
and to clarify some misconceptions about nonwovens. Also, Bontex is placing
greater emphasis on marketing nonwovens, developing new markets for
cellulose-based products, as well as developing new non-footwear products to
diversify our earnings stream. Management believes that the success of these
efforts over the next few years, although not assured, may lead to improved
sales, profits, and cash flows.

The net loss of $446,000 or $0.28 per share incurred in 1998 compares
unfavorably to $1.7 million or $1.10 per share net income of 1997, but is better
than the loss in 1996 of $602,000 or .38 per share. The inconsistent results are
a major concern to management. Typically, the financial performance of Bontex is
related directly to cycles in raw materials, particularly pulp and latex, as in
1996. For instance, the cost of pulp and latex, two primary raw materials, rose
by more than 100




                                       6
<PAGE>


and 56 percent, respectively during 1995 resulting in losses. However, as noted
above, the current year's loss occurred during a period of more favorable raw
materials costs. The lower sales volumes of Bontex have induced management to
pursue process efficiencies that better enable the Company to cope with
fluctuations in volume and raw material costs in the future. During 1998 and in
an ongoing effort, Bontex devotes significant resources to improve product
formulation for, among other things, comfort, health, cost, quality and other
critical competitive performance features. There can be no assurances that
increased raw materials prices or decreased volume of sales will not have an
adverse impact on the Company's operations or competitive position in the
future.

The Company's United States operations use the last in, first out (LIFO) method
of inventory accounting. For comparison purposes with other companies, if the
first-in, first-out, (FIFO) method of accounting had been used, reported gross
profit would have been lower by $96,000 in 1998, lower by $285,000 in 1997 and
lower by $147,000 in 1996. Net income would have been lower by $61,000 or $.04
per share in 1998, lower by $181,000 or $.12 per share in 1997 and lower by
$95,000 or $.06 per share in 1996. Inventories are higher by $1.2 million over
1997 due mainly to increased finished goods related to marketing programs and
global stock requirements.

As a percent of sales, selling, general and administrative (SG&A) expenses over
the previous three years were 27.4 percent in 1998, 24 percent in 1997 and 23.1
percent in 1996. The higher percentage in fiscal year 1998 is directly related
to sales decreasing at a higher rate than SG&A costs. The lower than normal SG&A
costs in 1996 were partly related to the reversal of a deferred compensation
accrual of $159,000. Additionally, in 1998 higher legal costs associated with
the disclosed lawsuits (Refer to Note 8 of Notes to the Consolidated Financial
Statements for further details on litigation) against the Company and some of
its officers significantly increased SG&A costs. Included in 1998 SG&A costs
were recruiting costs for restructuring and other non-recurring compensatory
costs. These costs are not expected to recur in this magnitude in the future and
management continues to look for ways to reduce SG&A costs.

The decrease in interest expense over the past year was due to debt reduction at
the Belgium operation and lower overall interest rates. Due to the net losses on
a consolidated basis, Bontex was unable to continue with its corporate wide plan
of debt reduction begun in 1997. Additional borrowings were necessary to fund
operations and complete capital projects. Bontex has implemented more control
over capital spending for the next fiscal year with the budgeted amount being
less than $900,000.

Short-term borrowings increased by $645,000 while accounts payable and accrued
expenses decreased by $947,000 compared to 1997 levels. The decrease in accounts
payable corresponds to the reductions in cash balances and accounts receivable.
The weighted average interest rate on short-term borrowings during 1998 and 1997
was 7.5 and 7.9 percent, respectively. The Company has entered into interest
rate swaps in the notional amount aggregating $2.3 million to fix interest rates
and protect the Company's financial position from increases in interest rates
related to our variable rate borrowings. Not all of our variable rate debt is
covered by the interest rate swap agreements and is therefore exposed to the
risk of rate increases. Financial instruments and market risk are discussed in
more detail below under Market Risk and Sensitivity.

The consolidated effective income tax rate for the Company was 23.5 percent in
1998, 39.1 percent in 1997 and 23 percent in 1996. The lower effective tax rates
in 1998 and 1996 were mainly due to operating losses. The higher effective rates
in 1997 were due to higher taxable income particularly at the Company's European
subsidiaries where income tax rates are higher. Management is confident that it
is more likely than not that the Company will realize deferred tax assets by
generating sufficient taxable income in the future. As discussed previously,
cost reduction and control measures recently implemented by management, product
development efforts, Bontex's strong market position and relatively stable raw
materials prices provide a platform for future profitability, as well as
effective tax planning. Refer to Note 5 of Notes to the Consolidated Financial
Statements for further details regarding income taxes.


                       INTERNATIONAL SALES AND OPERATIONS

Bontex continues to export a predominant portion of its production to countries
around the globe. Asia, where an estimated 70 percent of global shoe production
occurs, is the largest market for Bontex products. Sales to Asia are generally
denominated in US dollars which serves to limit the Company's exposure to
foreign exchange risk in relation to these countries.


                                       7
<PAGE>



Over the previous three years, approximately one-third of the Company's
consolidated sales were derived from customers in the Asian region. The overall
strength of the U.S. dollar and the currency devaluations in Asia have resulted
in additional pressure on earnings. Accordingly, the deteriorating situation in
Asia has had a negative impact on the Company's operations. However, even though
economic conditions in Asia have reduced our near-term growth expectations,
management is confident that the market ultimately will rebound. As the US
domestic market for footwear materials decreases, Bontex is pursuing
non-footwear sales and additional export opportunities. In areas where Bontex
has exposure to foreign currency risk, the Company attempts to manage these
risks with its Risk Management Program (RMP) implemented in 1995. The general
policy for the RMP is to match currency denominations of the Company's assets
and liabilities.

The RMP has proven to be effective in reducing the Company's exposure to
fluctuations in currency exchange rates in most cases, and, in some cases in
pulp prices. However, some exposure remains and as such Bontex continues to have
some gains and losses related to currency fluctuation. The Mexican peso and
Canadian dollar are examples of currencies for which effective hedging is not
available in a cost efficient manner and Bontex is currently forced to accept
the risk of doing business in these and other such markets. The $141,000
increase in exchange losses during 1998 are mainly due to declines in value of
the Mexican peso, Canadian dollar and the overall strength of the US dollar
during that period. Bontex has made limited use of the Pulpex Pulp Futures
Exchange to help reduce our exposure to changes in pulp prices.

On January 1, 1999, the EURO is expected to become the official currency of the
European Economic and Monetary Union (EMU). The EURO will have a significant
impact on the Company's operations, as approximately 30 percent of the Company's
consolidated sales are to customers in the European Union. If the EURO becomes
the official currency, the Company will have to implement a changeover plan to
convert, among other things, pricing, financial reporting, banking facilities,
financing, currency hedging and information systems. The Euro conversion may
also affect market risk. Management cannot currently provide more definitive
information concerning the implications of the EURO on the Company. There are
many unresolved issues including, but not limited to; conversion rates,
taxation, management reporting, accounting matters, that could materially
adversely impact the Company's operations and earnings. Refer to Notes 1 and 7
of the Notes to the Consolidated Financial Statements for further details
regarding currencies, market risks, and financial instruments as well as the
section of this Management's Discussion and Analysis titled, Market Risk of
Financial Instruments.


                         LIQUIDITY AND CAPITAL RESOURCES

The Company's liquidity and capital resources have decreased over the past year,
due to the net loss and investments in facility improvements deemed necessary by
management. Management believes that the Company's capital structure is
sufficient to finance short and long-term operations and objectives. The Company
may further alter its business strategy during fiscal year 1999 based on future
revenues and margin trends. The Company's cash conversion efficiency, cash flows
from operations divided by net sales, decreased from 6.03 percent in 1997 to
less than one percent this year. Cash, which largely represents financing,
hedging, and intercompany positions with respect to the Company's European
operations, decreased by $856,000 to $517,000. The Company's current ratio has
decreased from 1.06 in 1996 and 1.16 in 1997 to 1.05 this year.

Trade accounts receivable decreased $2.0 million to $11.6 million at June 30,
1998, as compared to last year due primarily to lower sales, improved aging, and
foreign currency translation adjustments. Consistent with the Company's
policies, the provision for bad debts was increased by $177,000 mainly due to
the larger balance in the over 90-day category.

Net property, plant and equipment is higher this year by approximately $1
million due to strategic investments. Through targeted capital and other
investments, Bontex's Belgium facility has developed into the most efficient and
highest capacity operation of its type in the world. Bontex USA has invested in
facility improvements that greatly enhances our reliability as a supplier to
overseas markets. Both Bontex facilities have also invested heavily in state of
the art environmental equipment to protect our environment and help ensure
compliance with government mandates. Capital investments during 1998 primarily
relate to non-recurring items in production and the environment. While these
projects have put additional strain on our capital resources, they are expected
to further establish Bontex as an industry leader in quality, efficiency,
reliability and as a responsible corporate citizen. The Company continues to
pursue efficiency and cost savings relative to the plans for the sale of the
Newark, New Jersey facility. The Newark property is for sale with no firm offers
as of this report date. Bontex anticipates completion of the Newark
restructuring during calendar year 1999 and the Company does not expect material
costs related to this restructuring.



                                       8
<PAGE>



The Company's secured debt facilities contain loan covenants, including certain
minimum financial ratios and borrowing base requirements. As a result of the
decrease in various financial ratios, $720,000 of the long-term debt was
classified as current at June 30, 1998. As of June 30, 1998 the Company has
received a waiver of the current loan ratio requirements and management is
working with its bankers to revise the financial ratios based on Bontex's
current financial position and plan. We expect the bank to work to resolve the
noncompliance issue in a manner favorable to the Company. Refer to note 4 of the
Notes to the Consolidated Financial Statements for further details regarding
Long-term Debt and Financing Agreements.

Over the past two years Bontex has invested approximately $175,000 in modern
information systems to improve data efficiency which should also resolve the
Company's year 2000 data systems exposure. The year 2000 issue relates to
computer programs using two digits rather than four to define the applicable
year. Inability to process data properly due to this phenomenon may result in
systems failures. The project is substantially complete with less than $25,000
remaining to be invested. The information system's work is expected to be
complete, utilizing internal and external resources, by November 1998. Bontex is
in the process of assessing the year 2000 readiness of its major customers and
vendors. The review is substantially complete with no material risks identified.
There can be no assurances that the date change from 1999 to 2000 will not
materially affect the Company's operations and financial results.

                           MARKET RISK AND SENSITIVITY

As previously discussed, in the section entitled, International Sales and
Operations, the Company is exposed to certain risks related to interest rates
and commodity positions. Market risk is defined as the risk of loss arising from
adverse changes in market rates and prices. The following disclosures provide
certain forward-looking data concerning potential exposures to market risk. The
Company has risk associated with its international operations, such as, foreign
exchange risk, interest rate risk and commodity prices. For discussion on these
risks and Bontex's associated Risk Management Program (RMP), refer to the
preceding sections. In general, our policy is not to speculate on interest rates
and commodities in markets but rather to fix our rates and prices at levels
considered favorable.

There is no expected material foreign exchange risk for the Company's debt, as
these amounts are denominated in the local operating currencies of the
respective operations. Assets and liabilities are hedged through our RMP, and
accordingly are not subject to material foreign exchange risk as well.

Fair value of financial instruments, other than trading (dollars in thousands):
<TABLE>
<CAPTION>

                             Face Amount / Carrying Amount  Estimated Fair Value
                             -----------------------------  --------------------
<S>     <C>    <C>    <C>    <C>    <C>    <C>
       June 30, 1998:
       --------------
       Interest Rate Exposure:
       Long term debt                      $3,620                    $3,620
       Short term debt                     $8,664                    $8,664
       Interest rate swaps                 $2,343                    $  (48)

       Commodity Price Risk:
       Pulp futures                        $1,948                    $1,760

       June 30, 1997:
       --------------
       Interest Rate Exposure:
       Long term debt                      $3,339                    $3,339
       Short term debt                     $8,019                    $8,019
       Interest rate swaps                 $1,889                    $  (76)
</TABLE>

The table below provides information about the Company's derivative financial
instruments that are sensitive to changes in interest rates. For debt
obligations, the table presents principle cash flows and related weighted
average interest rates by expected maturity dates. For interest rate swaps, the
table presents notional amounts and weighted average interest rates by expected
(contractual) maturity dates. Notional amounts are used to calculate the
contractual payments to be exchanged under contract. Weighted average variable
rates are based on implied forward rates in the yield curve at the reporting
date.



                                       9
<PAGE>



Derivative financial  instruments (held for other than trading purposes) at June
30, 1998. (dollars in thousands):

<TABLE>
<CAPTION>

                                                                      Expected Maturity Date
                                                                      ----------------------
                                                                                                 There-                  Estimated
                                       1999       2000        2001        2002      2003         after          Total    Fair Value

<S> <C>
      Liabilities
      Long-term debt
         Fixed Rate                   $1,364       $376        $376       $376      $376         $752          $3,620       $3,620
         Average interest rate          7.86%      6.11%       6.11%      6.11%     6.11%        6.11%           6.80%

      Interest Rate Derivative
      Interest Rate Swaps
         Fixed to Variable            $1,343     $1,000           -          -         -            -          $2,343         $(48)
         Average pay rate               6.55%      6.35%                                                         6.46%
         Average receive rate           3.67%      5.73%                                                         4.55%

</TABLE>


The Company's interest rate swaps fix the rate of interest for $2,343 of $8,664
total variable rate debt. In the event of lowering BIBOR or LIBOR rates, the
Company is exposed to higher fixed rates. The $6,321 variable rate debt not
covered by the interest rate swap is subject to the risk of interest rate
changes. The market risk sensitivity analysis above does not fully reflect the
potential net market risk exposure, because other market risk exposures may
exist in other transactions.


                        RECENT ACCOUNTING PRONOUNCEMENTS

Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," was issued in June 1998. This
Statement addresses the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. The
Statement will be effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999. Future adoption of this Statement could have a
material impact on the Company's consolidated financial position, or results of
operations. The Company is currently in process of reviewing the impacts of this
Statement. Refer to Notes 1 and 7 of Notes to the Consolidated Financial
Statements for further details regarding SFAS No. 133.

SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," is effective for periods after December 15, 1997. Management does
not believe this pronouncement will have a significant effect, if any, on the
Company's financial statements.

Management believes that Statement of Position (SOP) No. 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use," issued
March 4, 1998, and SOP No. 98-5, "Reporting on the Costs of Start-up
Activities," issued April 3, 1998 will not have a significant effect on the
Company's consolidated financial statements.

<PAGE>


                          BONTEX, INC. AND SUBSIDIARIES
    CONSOLIDATED STATEMENTS OF INCOME (LOSS) and COMPREHENSIVE INCOME (LOSS)
         and CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY






                    Years Ended June 30, 1998, 1997 and 1996
                      (In Thousands, Except Per Share Data)

<TABLE>
<CAPTION>


Consolidated Statements of Income (Loss) and Comprehensive Income (Loss):


                                                                    1998             1997             1996
<S>     <C>    <C>    <C>    <C>    <C>    <C>

NET SALES                                                         $43,483           $50,333          $47,618
COST OF SALES                                                      31,080            34,241           36,736
                                                                  --------         --------           -------
  Gross Profit                                                     12,403            16,092           10,882

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                       11,903            12,083           10,979
                                                                   -------           ------           --------

  Operating income (loss)                                             500             4,009             (97)
                                                                   --------          -------          --------

OTHER (INCOME) EXPENSES:
  Interest expense                                                  1,056             1,247            1,288
  Interest income                                                     (76)              (45)             (93)
  Foreign currency exchange (gain) loss                               115               (26)            (496)
  Other - net                                                         (12)              (13)             (14)
                                                                    --------       --------          --------
                                                                    1,083             1,163              685
                                                                    -------        --------          --------

INCOME (LOSS) BEFORE INCOME TAXES                                    (583)            2,846             (782)

INCOME TAXES                                                         (137)            1,113             (180)
                                                                   --------         --------         --------
NET INCOME (LOSS)                                                    (446)            1,733             (602)
                                                                    -------         --------         --------

OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustment                              (178)             (526)            (276)
                                                                    -------         --------         --------


COMPREHENSIVE INCOME (LOSS)                                       $  (624)          $ 1,207          $  (878)
                                                                    =======         ========         ========

NET INCOME (LOSS) PER SHARE                                       $  (.28)          $  1.10          $  (.38)
                                                                    ========        ========         ========


Consolidated Statements of Changes in Stockholders' Equity:
                                                                    1998             1997              1996

Stockholders' Equity, beginning balance                           $11,515           $10,308          $11,186

  Net income (loss)                                                  (446)            1,733             (602)
  Other comprehensive income (loss)
       Foreign currency translation adjustment                       (178)             (526)            (276)
                                                                   --------         --------         --------

Stockholders' Equity, ending balance                              $10,891           $11,515          $10,308
                                                                  ========          ========         ========

</TABLE>


See accompanying notes to consolidated financial statements.

<PAGE>



                          BONTEX, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS


                             June 30, 1998 and 1997
                 (In Thousands, Except Share and Per Share Data)

<TABLE>
<CAPTION>


ASSETS                                                                      1998             1997
<S> <C>
CURRENT ASSETS:
Cash                                                                    $    517          $ 1,373
   Trade accounts receivable, less allowance for doubtful
     accounts of $268 ($119 at 1997)                                      11,618           13,622
   Other receivables                                                         417              551
   Inventories                                                             6,436            5,276
   Deferred income taxes                                                     347              321
   Income taxes refundable                                                    56               76
   Other current assets                                                      338              131
                                                                         --------         --------
                                 Total current assets                     19,729           21,350
                                                                         --------         --------

PROPERTY, PLANT AND EQUIPMENT:
   Land and land improvements                                                369              347
   Building and building improvements                                      5,575            5,332
   Machinery, furniture and equipment                                     17,199           16,176
   Construction in progress                                                  781              808
                                                                         --------         --------
                                                                          23,924           22,663
    Less accumulated depreciation and amortization                        11,882           11,631
                                                                         --------         --------
    Net property, plant and equipment                                     12,042           11,032

Deferred income taxes                                                        187                -
Other assets                                                                 555              524
                                                                         --------         --------
                                Total assets                            $ 32,513         $ 32,906
                                                                         ========         ========


LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
   Short-term borrowings
                                                                        $  8,664         $  8,019
   Accounts payable                                                        7,133            7,521
   Accrued expenses                                                        1,520            2,079
   Income taxes payable                                                       41              139
   Long-term debt due currently                                            1,364              578
                                                                         -------           --------
                                 Total current liabilities                18,722           18,336

Long-term debt                                                             2,256            2,761
Deferred income taxes                                                         50              108
Other long-term liabilities                                                  594              186
                                                                         --------          --------
                                 Total liabilities                        21,622           21,391
                                                                         ========          ========

STOCKHOLDERS' EQUITY:
Preferred stock of no par value.  Authorized 10,000,000
   shares; none issued                                                         -                -
Common stock of $.10 par value.  Authorized 10,000,000
   shares; issued and outstanding 1,572,824 shares                           157              157
Additional capital                                                         1,551            1,551
Retained earnings                                                          8,898            9,344
Accumulated other comprehensive income                                       285              463
                                                                         --------          --------
                     Total stockholders' equity                           10,891           11,515
                                                                         --------          --------
                     Total liabilities and stockholders' equity          $32,513          $32,906
                                                                         ========         =========
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>


                          BONTEX, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


                    Years Ended June 30, 1998, 1997 and 1996
                                 (In Thousands)

<TABLE>
<CAPTION>


                                                                          1998             1997            1996
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers                                             $44,499          $48,846         $50,552
Cash paid to suppliers and employees                                     (43,245)         (44,283)        (48,226)
Interest received                                                             76               45              98
Interest paid, net of amount capitalized                                  (1,063)          (1,220)         (1,330)
Income taxes paid, net of refunds                                           (210)            (351)             86
                                                                         --------         --------         --------
         Net cash provided by operating activities                            57            3,037           1,180
                                                                         --------         --------         --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property, plant and equipment                          15                -              75
Acquisition of property, plant and equipment                              (2,334)          (2,389)         (2,157)
                                                                         --------         --------         --------
         Net cash used in investing activities                            (2,319)          (2,389)         (2,082)
                                                                         --------         --------         --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings, net                            888             (403)         (1,740)
Long-term debt incurred                                                    1,000            2,675             115
Principal payments on long-term debt                                        (594)          (2,023)           (694)
                                                                         --------         --------         --------
         Net cash provided by (used in)  financing activities              1,294              249          (2,319)
                                                                         --------         --------         --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH                                      112             (239)           (443)
                                                                         --------         --------         --------
NET INCREASE (DECREASE) IN CASH                                             (856)             658          (3,664)

CASH AT BEGINNING OF YEAR                                                  1,373              715           4,379
                                                                         -------         --------         --------
CASH AT END OF YEAR                                                      $   517          $ 1,373         $   715
                                                                         =======         ========         ========

RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
     Net income (loss)                                                   $  (446)         $ 1,733         $  (602)
     Adjustments  to  reconcile  net  income  (loss)  to net
        cash  provided  by operating activities:
         Depreciation and amortization                                     1,272            1,189           1,100
         (Gain) loss on sale of property, plant and equipment                 (8)               1              13
         Provision for bad debts                                             252               75              66
         Deferred income taxes                                              (271)             844            (387)
         Change in assets and liabilities:
           (Increase) decrease in trade accounts and other receivables     1,495             (807)            660
           (Increase) decrease in inventories                             (1,290)            (261)          2,123
           (Increase) decrease in other assets                              (322)              16              22
           Increase (decrease) in accounts payable and accrued expenses     (856)             320          (2,121)
           Increase (decrease) in income taxes                               (77)             (78)            273
           Increase in other liabilities                                     308                5              33
                                                                         --------         --------        --------
       Net cash provided by operating activities                         $    57          $ 3,037         $ 1,180
                                                                         ========         ========        ========

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
     Construction in progress accrued in payables and other liabilities  $   122          $    49         $    76
                                                                         ========         ========        ========

</TABLE>


See accompanying notes to consolidated financial statements.


<PAGE>


                          BONTEX, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                          June 30, 1998, 1997 and 1996
                  (All amounts in thousands, except share data)


[1]               SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Consolidation - The accounts of Bontex, Inc. and its wholly-owned subsidiaries,
Bontex S.A., Belgium, Bontex Italia, S.r.l., Italy and Bontex de Mexico C.V.,
Mexico, and its majority-owned subsidiary, Bontex Hong Kong Limited, (the
Company) are included in the consolidated financial statements after elimination
of significant intercompany accounts and transactions. Bontex Hong Kong
Limited's minority interest is not presented separately because it is not
material to the Company's consolidated financial statements.

Foreign Currency Translation - The financial statements of the Company's
subsidiaries outside the United States are measured using the local currency as
the functional currency. Assets and liabilities of these foreign subsidiaries
are translated into U.S. dollars at the rates of exchange as of the balance
sheet date. The resulting translation adjustments are included in other
comprehensive income as foreign currency translation adjustment and in
accumulated other comprehensive income. Translation gains or losses for Bontex
de Mexico C.V., a wholly-owned subsidiary located in a highly inflationary
country, are not material, and as such, are included in other comprehensive
income. Income and expense items are translated at weighted average monthly
exchange rates in effect during the year. Gains and losses from foreign currency
transactions are included in net income (loss).

Cash Equivalents - For purposes of the statements of cash flows, the Company
considers all highly liquid debt instruments with original maturities of three
months or less to be cash equivalents.

Inventories - Inventories are stated at the lower of cost or market. Cost of
inventories maintained in North America is determined on the last-in, first-out
(LIFO) method and in Europe on the first-in, first-out (FIFO) and weighted
average methods.

Property, Plant and Equipment - Property, plant and equipment are stated at
cost. The Company capitalizes interest cost as a component of the cost of major
construction in progress. During the previous three years, there was only one
major construction project, and capitalized interest totaled $142 for the year
ended June 30, 1996. There was no capitalized interest during 1998 and 1997.

Depreciation and Amortization - Depreciation is provided by the straight-line
method over the estimated useful lives of the related assets. Estimated useful
lives are 10 to 40 years for buildings and building improvements, and 3 to 25
years for machinery, furniture and equipment.

Other Assets - Other assets consist principally of cash surrender value of life
insurance, trademarks and various deposits. Trademark costs are amortized on a
straight-line basis over five years.

Revenue Recognition - Sales and cost of sales are recognized at the time of
product shipment or delivery to the customer, based on shipping terms.

Use of Estimates and Forward-Looking Data - 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 the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates. Except for the historical data set forth herein, certain
forward-looking information is contained in these disclosures. Actual amounts
may differ from these projections. Factors that could cause or contribute to
such differences include inherent limitations of model characteristics and
assumptions.


<PAGE>

Comprehensive Income - In June 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income". This statement establishes standards for the
reporting and display of comprehensive income and its components in the
financial statements. In accordance with the provisions of this statement, the
Company has included a Consolidated Statements of Income (Loss) and
Comprehensive Income (Loss) in the accompanying consolidated financial
statements. Comprehensive income (loss) for the years ended June 30, 1997 and
1996, have been presented for comparative purposes.

Earnings Per Share - In February 1997, the FASB issued SFAS No. 128, "Earnings
Per Share." SFAS No. 128 establishes new standards for computing and presenting
earnings per share ("EPS") and requires restatement of prior years' EPS data
previously presented. Adoption of SFAS No. 128 by the Company did not have any
effect on current or prior years' EPS data since there are no potential dilutive
common shares. Net income (loss) per share has been computed on the basis of the
weighted average number of common shares outstanding during each year (1,572,824
shares).

Derivative Instruments and Hedging Activities - The Company enters into interest
rate swap transactions to manage its interest rate exposure. Income or expense
arising from these transactions is accounted for as an adjustment to interest
expense over the term of the agreements. On a limited basis, the Company manages
its exposure to pulp price changes with pulp futures. In accordance with hedge
accounting, gains or losses are recorded as a component of the underlying
inventory purchase, since these contracts effectively meet the risk reduction
and correlation criteria. Gains or losses on hedges that are terminated prior to
the execution of the inventory purchase are recorded in inventory until the
inventory is sold. Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities," was issued in
June 1998. This Statement addresses the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities. The Statement will be effective for all fiscal quarters of
all fiscal years beginning after June 15, 1999. Future adoption of this
Statement could have a material impact on the Company's consolidated financial
position or results of operations. The Company is currently in process of
reviewing the impacts of this Statement.

Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of - The
Company reviews its long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future undiscounted net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
estimated fair value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or estimated fair value less costs to sell.

Income Taxes - Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.


<PAGE>


[2]                            INVENTORIES


Cost of inventories of approximately $2,893 in 1998, and $2,517 in 1997, is
determined by the last-in, first-out method (LIFO). Replacement cost for LIFO
inventories approximated $3,142 in 1998 and $2,862 in 1997. Inventories of
approximately $3,543 in 1998, and $2,759 in 1997, are determined by the
first-in, first-out (FIFO) and weighted average bases.

Inventories are summarized as follows:
<TABLE>
<CAPTION>

                                                          1998             1997
<S>                                                     <C>             <C>    
Finished goods                                          $ 3,782         $ 2,908
Raw materials                                             2,117           2,067
Supplies                                                    786             646
                                                        ---------       --------
Inventories at FIFO and weighted average cost             6,685           5,621
LIFO reserves                                               249             345
                                                         --------       --------
                                                        $ 6,436         $ 5,276
                                                        =========       ========
</TABLE>

During 1998, 1997 and 1996, LIFO layers were reduced resulting in charging lower
inventory costs to cost of sales of $55, $37 and $91, respectively.



                            BUSINESS SEGMENT INFORMATION
[3]                         AND INTERNATIONAL OPERATIONS

Bontex, Inc. and all majority-owned subsidiaries are predominantly engaged in
the manufacturing and distribution of uncoated and coated BONTEX elastomeric
fiberboard products. The Company operates manufacturing facilities at Bontex USA
in North America and Bontex S.A. in Belgium. BONTEX products are primarily used
as an insole material in footwear, as well as visorboard in headwear, stiffener
and laminating base for luggage, leathergoods and allied industries globally.

During 1998, 1997 and 1996, approximately one third of the Company's
consolidated net sales were in European countries and the largest portion of
European sales were in Italy. During 1998, 1997 and 1996, approximately one
third of the Company's consolidated net sales were in Asian countries and less
than a majority of those sales were in Taiwan. The recent deteriorating
financial situation in Asia has had a negative impact on the Company's
operations. Domestic consolidated net sales accounted for less than one fifth of
total consolidated net sales during 1998, 1997 and 1996. No single customer
accounted for 10 percent or more of the Company's consolidated net sales for
1998, 1997 and 1996.

Information related to the North American and European operations follows:

<TABLE>
<CAPTION>


                                                               North American       European
                                                                 Operations        Operations     Eliminations       Consolidated

<S> <C>
         1998:
            Total assets                                         $16,550             $17,961       $ (1,998)              $32,513
            Net income (loss)                                       (789)                343             -                   (446)
            Operating income (loss)                               (1,524)              2,024             -                    500
            Net sales                                             18,382              25,560           (459)               43,483
            Interest expense                                         286                 770             -                  1,056
            Deprecation and amortization                             763                 509             -                  1,272
            Income tax expense (benefit)                            (444)                307             -                   (137)
            Total expenditures for additions to property,
                plant and equipment                                1,175               1,159             -                  2,334
         1997:
            Total assets                                         $15,551             $19,801       $ (2,446)              $32,906
            Net income                                               784                 949             -                  1,733
            Operating income                                         707               3,302             -                  4,009
            Net sales                                             21,141              29,709           (517)               50,333
            Interest expense                                         328                 919             -                  1,247
            Deprecation and amortization                             736                 453             -                  1,189
            Income tax expense                                       315                 798             -                  1,113
            Total expenditures for additions to property,
                plant and equipment                                  956               1,433             -                  2,389

         1996:
            Total assets                                         $15,110             $20,412       $ (2,341)              $33,181
            Net loss                                                 (60)               (531)           (11)                 (602)
            Operating income (loss)                                 (622)                527             (2)                  (97)
            Net sales                                             18,486              29,507           (375)               47,618
            Interest expense                                         144               1,144             -                  1,288
            Deprecation and amortization                             596                 504             -                  1,100
            Income tax benefit                                      (126)                 19            (73)                 (180)
            Total expenditures for additions to property,
                plant and equipment                                1,654                 503              -                 2,157

</TABLE>


Retained earnings of foreign operations not available for distribution amounted
to approximately $763 and $846 at June 30, 1998 and 1997, respectively.

SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," is effective for periods after December 15, 1997. Management does
not believe this pronouncement will have a significant effect, if any, on the
Company's financial statements.




<PAGE>


[4]                  LONG-TERM DEBT AND FINANCING AGREEMENTS


The following long-term debt was outstanding as of June 30, 1998 and 1997:

<TABLE>
<CAPTION>

                                                                                           1998                 1997
<S> <C>

     8.50% loan payable to a bank in the United States in quarterly installments
     of $80 through July 2001; collateralized by accounts receivable,  inventory
     and other noncurrent assets in the U.S. and
     subject to various loan covenants                                                      $1,040               $1,360

     7.72% loan payable to an agency of the Belgian government in annual
     installments beginning May 15, 1992, subsequently rescheduled to quarterly
     installments through June 2005. Twenty-eight quarterly
     installments of $9 are outstanding at June 30, 1998                                       263                  311

     7.72% loan payable to an agency of the Belgian government in annual
     installments beginning September 1995, subsequently rescheduled to
     quarterly installments through June 2005. Twenty-eight quarterly
     installments of $17 are
     outstanding at June 30, 1998                                                              470                  556

     5.20%, previously 6.15%, loan payable to an agency of the Belgian
     government in quarterly, previously annual, installments beginning
     September 1997 to June 2005. Twenty-eight quarterly installments of $34 are
     outstanding
     at June 30, 1998                                                                          940                1,112

     5.50% loan payable to an agency of the Belgian government in quarterly
     installments, beginning September 1997 to June 2005. Twenty-eight quarterly
     installments of $8 are outstanding at June 30, 1998                                       235                    -

     5.85% loan payable to an agency of the Belgian government in twenty-five
     quarterly installments of $26
     beginning March 1999 to June 2005                                                         672                    -
                                                                                            -------              --------
                                                                                             3,620                3,339

Less long-term debt due currently                                                            1,364                  578
                                                                                            --------             --------
     Long-term debt                                                                         $2,256               $2,761
                                                                                            ========             ========

The principal payments of long-term debt are as follows:


                 1999                                                                       $1,364
                 2000                                                                          376
                 2001                                                                          376
                 2002                                                                          376
                 2003                                                                          376
                 Thereafter                                                                    752
                                                                                            --------
                 Total                                                                      $3,620
                                                                                            ========

</TABLE>
The loans payable to an agency of the Belgian government are collateralized with
a mortgage on Bontex S.A.'s buildings and the right to request a second mortgage
on the buildings. 

     European operations have short-term credit facilities totaling
approximately $8,776 and $7,976 at June 30, 1998 and 1997 respectively. As of
June 30, borrowings under these facilities were as follows:

                                                         1998         1997
Short-term bank loans with various interest
   rates between 3.05% and 9.20%                        $6,084        $6,588
Overdrafts                                                  66           233
                                                        --------      --------
                                                        $6,150        $6,821
                                                        ========      ========

<PAGE>


Four banks in Belgium share a security interest in most of the assets of Bontex
S.A. for 43 percent of the credit facilities granted, and the right to request
additional security interest of another 43 percent of the credit facilities
granted. As of June 30, 1998 and 1997, one of the banks under these facilities
had the right to request a security interest up to $1,075.

Bontex USA has lines of credit arrangements with three banks whereby Bontex USA
may borrow up to $2,750 secured and $450 unsecured at the one month London Inter
Bank Offered Rate (LIBOR) plus 2.0 percent and 1.75 percent, respectively (7.69
percent and 7.44 percent, respectively, at June 30, 1998). At June 30, 1998 and
1997, Bontex USA had borrowings of $2,514 and $1,198, respectively, outstanding
under these lines of credit. The secured line of credit is collateralized by the
same security as the long-term debt discussed below.

Consolidated weighted average interest rates on short-term borrowings at June
30, 1998 and 1997 are 7.5 and 7.9 percent, respectively.

During 1998 and 1997, Bontex USA was subject to various loan covenants under its
secured debt agreement and has pledged certain current and noncurrent assets as
collateral. Bontex USA was in compliance with the applicable covenants at June
30, 1997, including the maintenance of certain minimum financial ratios and
borrowing base requirements. As a result of the decrease in various financial
ratios relating to $720 of long-term debt at June 30, 1998, Bontex USA obtained
a wavier from such requirements. There is no assurance Bontex USA will be able
to obtain future waivers from such requirements, and accordingly, $720 of the
long-term debt has been classified as current. In August 1996, Bontex USA
refinanced its previous long-term debt with its current secured debt agreement
resulting in a $38 write-off of deferred financing costs related to the early
extinguishment of debt which were recognized during fiscal 1997.


[5]                               INCOME TAXES

The U.S. and foreign components of the provision (benefit) for income taxes are
presented as follows:

<TABLE>
<CAPTION>

                                Current         Deferred            Total
<S> <C>
        1998:
           Federal            $    (72)        $   (334)         $  (406)
           State                   (18)             (41)             (59)
           Foreign                 224              104              328
                              --------         ---------         --------

                              $    134         $   (271)         $  (137)
                              ========         =========         =======-

        1997:
           Federal            $     41         $    246          $   287
           State                    (1)              29               28
           Foreign                 229              569              798
                              --------         ---------         --------

                              $    269         $    844          $ 1,113
                              ========         =========         ========

        1996:
           Federal            $    (91)        $    (49)         $  (140)
           State                     -               (5)              (5)
           Foreign                 298             (333)             (35)
                              --------         ---------         --------

                              $    207         $   (387)         $  (180)
                              ========         =========         ========
</TABLE>

<PAGE>


The provision (benefit) for income taxes differs from the expected tax expense
(benefit), computed by applying the U.S. Federal corporate rate to income or
loss before income taxes, as follows:

<TABLE>
<CAPTION>



                                                          1998          1997           1996
<S> <C>

        Federal income tax at statutory rate           $ (198)        $   968         $  (265)
        Increase (reduction) in income taxes
           resulting from:
             Foreign Sales Corporation                      -             (96)              -
             Foreign income at other than
                U.S. rates                                 33             116              64
             State and local taxes, net of federal
                income tax benefit                        (27)             18              (3)
             Other differences, net                        55             107              24
                                                        ---------     ---------        ---------

                Provision (benefit) for income taxes   $ (137)        $ 1,113         $  (180)
                                                       =========      =========        ==========

        Effective income tax rate                         (23)%            39%            (23)%
                                                       =========      =========        ==========

        U.S. Federal statutory income tax rate             34%             34%             34%
                                                       =========      =========        ==========

</TABLE>

The components of deferred tax assets and  liabilities at June 30, 1998 and 1997
are presented below:

<TABLE>
<CAPTION>


                                                                           1998          1997
<S> <C>
        Deferred tax assets:
           Accounts receivable, principally due to allowance
              for doubtful accounts                                       $   20       $   22
           Inventories, principally due to additional costs
              capitalized for tax purposes                                   127          101
           Other assets, due to difference in amortization of
              trademarks                                                     151          136
           Accrued pension and retirement benefits                           158          144
           Net operating loss carryforwards                                  713          277
           Alternative minimum tax credit carryforwards                       36           88
           Other                                                             129          159
                                                                          ------      --------
                      Total gross deferred tax assets                      1,334          927
                                                                          ------      --------
        Deferred tax liabilities:
           Plant and equipment, principally due to differences
              in depreciation and capital gain recognition                $ (823)      $ (690)
           Other                                                             (27)         (24)
                                                                          ------      --------

                      Total gross deferred tax liabilities                  (850)        (714)
                                                                          ------      --------

                      Net deferred tax assets                             $  484       $  213
                                                                          ======      ========
</TABLE>

<PAGE>


The U.S. and foreign components of the net deferred tax asset at June 30, 1998
and 1997 are presented below:

<TABLE>
<CAPTION>

                                      Current        Noncurrent     Total
<S>    <C>  
       1998:
            U.S. Operations            $  270         $  187       $  457
            European Operations            77            (50)          27
                                       -------        -------      -------
                                       $  347         $  137       $  484
                                       =======        =======      =======

       1997:
            U.S. Operations            $  136         $  (54)      $   82
            European Operations           185            (54)         131
                                       -------        -------      -------
                                       $  321         $ (108)      $  213
                                       =======        =======      =======
</TABLE>


At June 30, 1998, in addition to the alternative minimum tax credit carryforward
of $36 at Bontex USA, the Company had approximately $1,960 at Bontex USA in net
operating loss carryforwards to offset future taxable income, of which $258,
$361 and $1,341 at Bontex USA expire in 2010, 2011 and 2013, respectively.

Deferred tax assets at June 30, 1998 include $749 related to the alternative
minimum tax credit and net operating loss carryforwards at Bontex USA. The
Company will need to generate future taxable income of $2,066 at Bontex USA
during the tax carryforward periods to realize the alternative minimum tax
credit and net operating loss carryforwards.

In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Based upon the level of
historical taxable income, anticipation of future taxable income over the
periods which the deferred tax assets are deductible, reversal of the temporary
differences and available tax planning strategies, management believes it is
more likely than not the Company will realize these deferred tax assets.

At June 30, 1998, the Company has not recognized a deferred tax liability of
$107 for the cumulative amount of undistributed income of its foreign
subsidiaries, because there are no plans to pay dividends in the foreseeable
future. As of June 30, 1998, undistributed income of the foreign subsidiaries
was approximately $2,143, of which approximately $763 is not available for
distribution.


<PAGE>



[6]                       RETIREMENT AND COMPENSATION PLANS


The Company has pension plans covering substantially all full-time domestic
employees and certain foreign employees. The benefits from the Company's
domestic defined benefit plan are based upon years of service and the employee's
average earnings for the five highest consecutive years of compensation during
the ten years immediately preceding retirement. The Company's funding policy is
to contribute amounts to the plan sufficient to meet the minimum funding
requirements set forth in the Employee Retirement Income Security Act of 1974,
and any such additional amounts as theCompany may determine to be appropriate
from time to time. Annual provisions for accrued pension costs are based on
independent actuarial valuations.

In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This Statement standardizes the
disclosure requirements for pensions and other postretirement benefits, requires
additional information on changes in benefit obligations and fair values of
assets and eliminates certain existing disclosure requirements. The Company
adopted the provisions of SFAS No. 132 in the current fiscal year.

<PAGE>


The Plan's change in benefit obligation, change in plan assets, funded status
and amounts recognized in the Company's consolidated financial statements at
June 30 for its United States pension plan are as follows:

<TABLE>
<CAPTION>


                                                                     1998                   1997
<S> <C>

Actuarial present value of benefit obligations:
    Accumulated benefit obligation, including
          vested benefits (1998, $4,404 and 1997, $4,225)        $  4,493                $   4,235
                                                                 ========                ========

Change in Benefit Obligation:
Benefit obligation at beginning of year                          $  5,242                $   5,218
Service cost                                                           16                       44
Interest cost                                                         397                      370
Plan participants' contributions                                       71                       46
Actuarial gain                                                        103                     (221)
Benefits paid                                                        (247)                    (215)
                                                                 ---------               ---------
Benefit obligation at end of year                                $  5,582                $   5,242
                                                                 =========               =========

Change in Plan Assets:
Fair value of plan assets at beginning of  year                  $  4,868                $   4,346
Actual return on plan assets                                          766                      574
Employer contribution                                                  95                      117
Plan participants' contributions                                       71                       46
Benefits paid                                                        (247)                    (215)
                                                                 ---------               ---------
Fair value of plan assets at end of year                         $  5,553                $   4,868
                                                                 =========               ==========

Funded status                                                    $    (29)               $    (374)
Unrecognized net actuarial loss                                      (392)                     (68)
Unrecognized prior service cost                                       147                      162
Unrecognized transition obligation                                    (98)                    (115)
                                                                 ---------               ----------
Accrued benefit costs                                            $   (372)               $    (395)
                                                                 =========               =========

</TABLE>


The Company's net periodic benefit costs for the years ended June 30, 1998, 1997
and 1996 include the following components:
<TABLE>
<CAPTION>

                                           1998          1997          1996

<S>                                     <C>           <C>           <C>  
Service cost                            $   182       $   175       $ 200
Interest cost                               397           370         366
Actual return on plan assets               (766)         (574)       (366)
Employee contributions                      (71)          (46)        (41)
Net amortization and deferral               330           190           2
                                         ------        -------      -------
Net periodic benefit cost               $    72       $   115       $ 161
                                         ======        =======      =======
</TABLE>

The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligations was 7.75 percent for 1998, 1997 and
1996. The rate of increase for future compensation levels used in determining
the obligation was 5.0 percent for 1998 and 1997 and 4.5 percent for 1996. The
expected long-term rate of return on plan assets in 1998, 1997 and 1996 was 9.0
percent.

Pension assets are held under a group annuity contract with an insurance
company. Certain amounts are commingled with the general assets of the insurance
company and the remainder is invested in separate accounts, which include
domestic equity, domestic government, corporate and private placement bonds and
domestic real estate equity, of the insurance company, at fair value.

The pension expense relating to the foreign subsidiary's insured pension and
disability plan amounted to $ 45 , $69, and $86 in 1998, 1997 and 1996,
respectively. Benefits are based on years of service and the average of the last
five years annual earnings.

<PAGE>


The Company provides a tax deferred compensation benefit plan for certain
executives. The plan allows the employee to defer up to four percent of his
compensation with a Company match of up to one percent of compensation. The
Company's contribution funds life insurance policies on each executive, with the
Company as owner and beneficiary. The Company's expense for the plan in 1998 and
1997 was $6 and $3, respectively.

The Company provides certain supplemental retirement benefits to the President
of the Company. Expenses related to these benefits were approximately $112 in
1998, $146 in 1997 and $143 in 1996. The agreement contains a change in control
provision that would accelerate the payment of these benefits. The maximum
liability under this agreement, in such event, would be approximately $226.

On October 3, 1994, the Board of Directors adopted a deferred compensation
agreement with Hugo N. Surmonte, Chairman of the Board of Directors. The
deferred compensation agreement required the Company to pay Mr. Surmonte $150
per year, after his retirement from the Company and during his lifetime, and if
Mr. Surmonte's death preceded his spouse's death, that such amounts shall be
paid to his spouse for the remainder of her life. On October 5, 1994, Mr.
Surmonte retired from the Company. On October 10, 1994, Mr. Surmonte died and
per the agreement his widow, Marie G. Surmonte, received the benefit until her
death on June 2, 1996. During fiscal year 1996, the Company paid $138 to Mrs.
Surmonte, and reversed the remaining balance of $159 for this accrued liability
in fiscal 1997.


[7]                           FINANCIAL INSTRUMENTS

The Company uses various financial instruments in the normal course of business.
By their nature, all such instruments involve risk, and the Company's maximum
potential loss may exceed amounts recorded in the balance sheet. As is customary
for these types of instruments, the Company does not require collateral or other
security from other parties to these instruments. However, because the Company
manages exposure to credit risk through credit approvals, credit limits and
monitoring procedures, the Company believes that reserves for losses are
adequate.

The Company uses derivative instruments for the purpose of hedging commodity and
interest rate exposures. As a policy, the Company does not engage in speculative
transactions, nor does the Company hold or issue financial instruments for
trading purposes.

Interest Rate Swaps - The Company has two outstanding interest rate swap
agreements with banks having an aggregate notional amount of $2,343, of which
$1,343 and $1,000 will terminate on June 15, 1999 and January 20, 2000,
respectively. These swap agreements provide for the payment of interest based on
fixed rates ranging from 6.35 percent to 6.55 percent, and remain unchanged over
the term of the agreements. The floating rates of the debt agreements are based
on the Brussels Inter Bank Offering Rate (BIBOR) or the London Inter Bank
Offered Rate (LIBOR) and are reset every 90 days based on market conditions. The
nature of the swap agreements changes certain variable rate debt to fixed rate
debt. Interest rate differentials paid or received under these swaps are
recognized over the terms of the contracts as adjustments are made to the
effective yield of the underlying debt. An interest premium of $41 , $67, and
$34 was paid during 1998, 1997, and 1996, respectively. The Company may be
exposed to credit loss in the event of nonperformance by the other party to the
interest rate swap agreement. However, the Company does not anticipate such
nonperformance.

The contract or notional amounts and estimated fair value of the Company's
interest rate swaps at June 30, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>


                                          1998                                     1997
                       Contract or Notional    Estimated        Contract or Notional     Estimated
                              Amount           Fair Value             Amount             Fair Value
<S> <C>
Interest rate swaps           $2,343            $  (48)               $1,889               $ (76)


</TABLE>

The Company's interest rate swaps fix the rate of interest for $2,343 of $8,664
total variable rate debt. In the event of lowering BIBOR or LIBOR rates, the
Company is exposed to higher fixed rates. The $6,321 variable rate debt not
covered by the interest rate swaps is subject to market risk of rate changes.

Commodities - During the first quarter of fiscal year 1998, the Company began on
a limited basis to manage its exposure to pulp price changes with pulp futures.
In accordance with hedge accounting, gains or losses are recorded as a component
of the underlying purchase, since these contracts effectively meet the risk
reduction and correlation criteria. Gains or losses on hedges that are
terminated prior to the execution of the inventory purchase are recorded in
inventory until the inventory is sold. The following table provides certain
information regarding the Company's pulp inventory and futures contracts that
are sensitive to changes in pulp prices. For inventory, the table presents the
carrying amount and fair value at June 30, 1998. For future contracts, all of
which mature within the next year, the table presents the notional amounts and
fair value at June 30, 1998.


<PAGE>

Balance sheet commodity pulp position and related derivatives held for other
than trading at June 30, 1998 and expire within the next twelve months:

                                Carrying Amount      Estimated Fair Value
       Pulp Inventory               $1,444                $1,444

       Related Derivatives      Expected Maturity    Estimated Fair Value
         Pulp Futures               $1,948                $1,760

Fair Value of Financial Instruments - The following assumptions were used by the
Company to estimate the fair value of its financial instruments: The carrying
amounts reported in the balance sheet for cash, cash equivalents, trade accounts
receivable, other receivables, short-term borrowings, accounts payable and
accrued expenses approximate fair value because of the short maturity of these
instruments. The fair value of long-term debt is estimated using discounted cash
flows based on the Company's incremental borrowing rates, and approximate the
carrying amount in the balance sheets. Unrealized gains or losses on the fair
value of commodity futures and interest rate swap agreements are estimated based
on current interest and pulp exchange rates.


[8]                       COMMITMENTS AND CONTINGENCIES

Regulatory and Environmental Matters - As with other related manufacturers, the
Company is subject to regulations by various federal, state, foreign and local
agencies concerning compliance with environmental control statutes. These
regulations impose limitations on the use of chemicals in manufacturing
processes and discharge of effluent and emissions into the environment, and
establish standards for solid and hazardous waste disposal, treatment, and
storage, as well as require the Company to obtain and operate in compliance with
the conditions of environmental permit. The Company believes that it is in
substantial compliance with such existing domestic and foreign environmental
statues and regulations. Failure to comply with applicable environmental control
standards could result in interruption of operations or could require additional
expenditures at these facilities.

In recent years various agencies have increased their screening and testing the
effects of chemicals or mixtures, including those that occur naturally. The
Company's product formulations, in some instances, may include compounds that
are or will be subject to these tests. The Company continually devotes
significant resources to improve product formulation for, among other things,
comfort, health, cost, quality and other performance features.

The Company has made and intends to continue to make capital investments,
operating expenditures, and production adjustments in connection with compliance
with environmental laws and regulations. Since the Company is essentially
comprised of two fiberboard plants, Bontex USA and Bontex S.A., water quality
discharge remains the primary environmental concern. Both plants are operating
new waste water treatment facilities, which the Company believes to be operating
within compliance of applicable environmental requirements.

Bontex USA is also impacted by regulations concerning air emissions relating to
the operation of certain coating and converting equipment. The Company entered
into a Consent Order with the Virginia Department of Environmental Quality
pursuant to which the Company committed to take appropriate corrective action
with respect to air quality emissions and to achieve compliance by December 31,
1997. The air emission control equipment has been installed at a cost of
approximately $456, and appears to be operating within compliance of applicable
environmental requirements.

The actual costs of future environmental compliance may differ from projected
costs due to, among other things, continued emergence of newer environmental
laws and regulations and improving efficiencies in environmental control or
process technology developments.

<PAGE>


Litigation - On March 17, 1998, a complaint was filed in the Superior Court of
New Jersey by Patricia Tischio, a director of Bontex, Inc., against the Company,
James C. Kostelni, the President and Chief Executive Officer of the Company, and
Mr. Kostelni's spouse. Both Mrs. Tischio and Mrs. Kostelni are daughters of the
Company's founder and serve as co-executors and co-trustees of, and are
designated beneficiaries under, an estate and certain trusts which, in the
aggregate, beneficially own approximately 43 percent of the Company's
outstanding common stock.

Mrs. Tischio's complaint sets out various counts relating to the defendants'
alleged breach of and interference with an alleged contract relating to Mr.
Tischio's employment with the Company and seeks unspecified damage, declaratory
and other relief. Management believes that Mrs. Tischio's claims are without
merit and the Company intends to vigorously defend the lawsuit.

Mrs. Tischio also has notified the Company's Board of Directors that she expects
to take part in separate litigation in the near future to enforce her separate
rights as a Company shareholder. Mrs. Tischio has complained to the Board of
Directors of mismanagement and misconduct on the part of Mr. Kostelni and
certain other Company officers and directors. In response to these allegations,
the Company formed a special committee of independent directors, which engaged
independent counsel, to investigate Mrs. Tischio's allegations. Following its
investigation, the special committee issued a written report to the Board
finding Mrs. Tischio's allegations to be materially unfounded.

During 1998, the Company spent approximately $247 for legal fees in conjunction
with the above matters.

In the normal course of business, the Company is subject to proceedings,
lawsuits and other claims which are subject to many uncertainties, for which
their outcomes are not predictable with assurance. There are no legal
proceedings, lawsuits or other claims pending against or involving the Company
which, in the opinion of management, will have a material adverse impact upon
the consolidated results of operations or financial condition of the Company.

Purchase Commitments - In connection with purchasing certain commodities (pulps
and latex) for future manufacturing requirements, the Company enters into a
number of purchase commitments, as deemed appropriate, to manage the effects of
market price fluctuations and to secure adequate raw material supplies. These
purchase commitments have limited terms and the Company expects future sales
will be sufficient to meet these requirements. Refer to Note 7 of the Notes to
Consolidated Financial Statements for further details regarding commodities.

Year 2000 Issue - The Year 2000 Issue relates to computer programs using two
digits rather than four to define the applicable year. Date-sensitive software
using a date "00" may recognize the year as 1900 rather than the year 2000,
which may result in system failure or miscalculations causing disruptions of
operations, including, among other things, temporary inability to process
transactions, send invoices, or engage in similar normal business.

The Company believes that there are no material, adverse implications to the
operations of the Company concerning the Year 2000 Issue. However, as part of
the Company's planned capital projects, the Company is in the process of
upgrading its computer system and software. The conversion to the new computer
system will properly utilize dates beyond December 31, 1999. The total cost of
the project, which will be capitalized, is estimated to approximate $200 and the
Company plans to have the computer project completed before December 31, 1999.

The cost of the project and the date on which the Company plans to complete the
system upgrade is based on management's best estimates. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
significantly from those plans. Specific factors which could contribute to such
material differences include, but are not limited to, ultimate circumstances.
Furthermore, the Company may be vulnerable to those third parties' failure to
remediate their own Year 2000 Issue. The Company has initiated communication
with significant suppliers and large customers to address the Year 2000 Issue.
There can be no guarantee that the systems of other companies on which the
Company's systems rely will be timely converted or that a failure to convert by
a supplier, customer or other third party, or a conversion that is incompatible
with the Company's systems, would not have a material adverse effect on the
Company and its operations.

EURO Currency Conversion - On January 1, 1999, the EURO is expected to become
the official currency of the Economic and Monetary Union (EMU). Accordingly, the
EURO will have a significant affect on the Company's operations, as
approximately 30 percent of the Company's consolidated sales are to customers
located in the Europe Union. Additionally, a large portion of the Company's
manufacturing and marketing operations are based in Belgium and Italy. If the
EURO becomes the official currency, the Company will have to implement a
changeover plan to convert, among other things, pricing, financial reporting,
banking facilities, financing, currency hedging, and information systems.


<PAGE>

Management cannot currently provide more definitive information concerning the
implications of the EURO on the Company, as there remain a number of unresolved
issues, including conversion rates, dual pricing, taxation, management
reporting, accounting matters, and other such issues.

Leases - Rental expenses for all operating leases amounted to $127, $116 and
$161 in 1998, 1997 and 1996, respectively. The Company anticipates future rental
expenses for operating leases to approximate $130 each year for the next five
years.



                          INDEPENDENT AUDITORS' REPORT

[KPMG PEAT MARWICK LLP LOGO]
10 S. Jefferson Street, Suite 1710
Roanoke, VA 24011-1331





Independent Auditors' Report

The Board of Directors and Stockholders of Bontex, Inc.:

We have audited the accompanying consolidated balance sheets of Bontex, Inc. and
subsidiaries as of June 30, 1998 and 1997, and the related consolidated
statements of income (loss) and comprehensive income (loss), changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended June 30, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Bontex, Inc. and
subsidiaries as of June 30, 1998 and 1997, and the results of their operations
and their cash flows for each of the years in the three-year period ended June
30, 1998, in conformity with generally accepted accounting principles.


                                                        s/KPMG Peat Marwick LLP
                                                          KPMG Peat Marwick LLP

August 14, 1998




<PAGE>
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

--------------------------------
DIRECTORS, EXECUTIVES & OFFICERS
--------------------------------
James C. Kostelni   +   Chairman of the Board, President, Chief Executive Officer,
                            Director

William J. Binnie   +*  Director

Michael J. Breton       Corporate Director of International Operations,
                            Director

William B. D'Surney     Director

David A. Dugan          Controller and Assistant Corporate Secretary

Charles W. J. Kostelni  Corporate Controller and Corporate Secretary

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

Jeffrey C. Kostelni     Treasurer and Chief Financial Officer,
                             Director

Frank B. Mayorshi   +*  Director

Larry E. Morris         Technical Sales Director,
                             Director

Dr. Joseph F. Raffetto  Director

Patricia S. Tischio     Director

Robert J. Weeks     +*  Director
</TABLE>

                                      + Member of Executive Committee
                                      * Member of Audit Committee

                                   -------
                                   COUNSEL
                                   -------


                       Woods, Rogers & Hazlegrove, P.L.C.    Roanoke, Virginia
                               Attorneys at Law

                              --------------------
                              INDEPENDENT AUDITORS
                              --------------------

                               KPMG Peat Marwick LLP         Roanoke, Virginia
                           Certified Public Accountants

                                 ---------------
                                 TRANSFER AGENT
                                 ---------------

                          Registrar & Transfer Company    Cranford, New Jersey

<PAGE>

<TABLE>
<CAPTION>

LOCATIONS                                              SHAREHOLDERS' INFORMATION
---------                                              -------------------------
<S> <C>

Global Headquarters and U. S. Manufacturing              Annual Meeting
  Bontex, Inc.                                             10:30 a.m. October 22, 1998
  One Bontex Drive                                         Best Western Inn at Hunt Ridge
  Buena Vista, Virginia 24416-1500                         Willow Springs Drive
  800-733-4234                                             Lexington, Virginia 24450
  E-mail:  bontex@bontex.com
  http://www.bontex.com                                  Independent Auditors
                                                           KPMG Peat Marwick LLP
European Headquarters and Manufacturing                    10 S. Jefferson Street, Suite 1710
  Bontex S. A.                                             Roanoke, Virginia 24011-1331
  Rue Slar
  4801 Stembert, Belgium                                 Registrar and Transfer Agent
  E-mail:  bontexsa@mail.att.net                           Registrar and Transfer Company
                                                           10 Commerce Drive
Sales and Distribution Centers                             Post Office Box 1010
  Bontex Italia s.r.l.                                     Cranford, New Jersey 07106
  Via Francia
  37069 Villafranca (Verona)                             Form 10-K
  Italy                                                    A copy of the  Company's  10-K filed with the
                                                           Securities  and Exchange Commission is
  Bontex De Mexico, S. A. De C. V.                         available without charge to any shareholder.
  Boulevard Mariano Excobedo #801                          Requests should be sent to the attention of:
  Colonia Andrade, C. P. 37370                             
  Leon, Guanajuato                                         Corporate Controller
  Mexico                                                   Bontex, Inc.
                                                           One Bontex Drive
  Bontex Hong Kong                                         Buena Vista, Virginia 24416-1500
  Flat B3, 12/F, Paterson Bldg.                       
  7 Great George Street
  Causeway Bay, Hong Kong

International Liaison Offices
  Bontex Australia
  20 Munro Street
  Macleod VIC 3085
  Australia                                         ----------------------------------------------------
                                                    [BONTEX LOGO]
  Bontex Korea
  Rm. 601, Songnam Bldg.                             Bontex is a registered trademark of Bontex, Inc.
  76-1, 4Ga, Chung Angdong
  Chung-Gu, Busan, 600-014, Korea                    Bontex, Inc., is an equal opportunity employer

  Bontex Taiwan                                      ---------------------------------------------------
  8FL.,  No. 52, Sec. 2
  Chung Shan N. Rd.
  Taipei, Taiwan

North American Warehouse Facilities
  St. Louis, Missouri
  Cambridge, Ontario, Canada
  Montreal, Quebec, Canada

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(Bontex Logo) BONTEX (R)
One Bontex Drive, Buena Vista, VA  24416-1500
Telephone:  540-261-2181     Fax:  540-261-3784
E-Mail:  bontex@bontex.com    http://www.bontex.com

Manufactured: Bontex (R) Buena Vista, VA Bontex (R) S.A., Stembert, Belgium
Distributed and Converted by: Bontex (R) Italia S.R.L., Villafranca, Verona,
Italy. Bontex (R) de MEXICO, Leon, Mexico Bontex (R) Hong Kong

Accepted
[Logo]
American
Podiatric
Medical
Association

QA
BS EN 150 9001
Registered 
Company
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SATRA
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Certificate No. 0995003
Standard Issue
1994

National
Accreditation
of Certification
Bodies
Registration No. 56

SATRA
Footwear
Technology Centre