Exhibit 13
[FRONT COVER]


                            [Bontex logo] BONTEX [R]
                              [2001 Annual Report]



<PAGE>



CONTENTS


                           [BONTEX SYMBOL] BONTEX [R]


                         CONSOLIDATED 2001 ANNUAL REPORT

         "WITH OVER 50 YEARS OF EXPERIENCE, BONTEX IS A GLOBAL LEADER IN
          OUR CORE INDUSTRIES WE SERVE. ALMOST ALL THE BRANDED FOOTWEAR
                       IN THE WORLD USE BONTEX, AND DURING
2001, BONTEX CONTINUED TO DEVELOP AND INTRODUCE MORE NEW AND ADVANCED PRODUCTS."

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


2          Mission Statement, Corporate and           5         Management's Discussion and
           Product Profile                                      Analysis

3          Message to Shareholders                    13        Consolidated Financial Statements and
                                                                Notes

4          Financial Highlights                       28        Independent Auditors' Report

</TABLE>

CORPORATE HIGHLIGHTS
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>


1946        Bontex was originally established as a leather        1996       The Company restructures and officially
            processing operation in Newark, New Jersey.                      operates globally as Bontex, Inc., formerly
                                                                             Georgia Bonded Fibers, Inc.
1954        Bontex elastomeric wet web cellulose materials
            were first produced in Buena Vista, Virginia.         1997       Bontex export sales from USA exceed $10
                                                                             million.  Bontex establishes Bontex Hong
1959        Bontex goes public with stock issuance and listing               Kong to further expand export sales.
            on NASDAQ stock market.                                          Bontex enters into key strategic
                                                                             partnerships to market a range of
1969        Bontex begins Bontex SA investment in Belgium,                   nonwoven materials.  Bontex becomes the
            then and today, one of the world's largest and                   first global manufacturer in our industry to
            highest capacity factories manufacturing                         be ISO  9001certified, SATRA accredited
            elastomeric wet web fiberboard products.                         laboratory certified and SATRA Quality
                                                                             Mark approval for several products.

1986        Bontex establishes a base of operations in Italy, as
            Bontex Italia begins sales, marketing, and            1999-      Three year transition as Bontex begins
            converting operations.                                2001       long-term repositioning as a multi-
                                                                             dimensional company. Bontex introduced a
1995        Bontex sales exceed $50 million. Bontex                          broader range of materials, including
            establishes Bontex de Mexico to expand export                    Bontex 90 Insole Seat-board, economical
            sales.                                                           insole products, Bon-Stitch linings, and

                                                                             Bon-Stitch next generation nonwoven
                                                                             insoles. Bontex embarks on an advanced
                                                                             material system for footwear and
                                                                             non-footwear applications.
</TABLE>


                                        1

<PAGE>



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 as a leather processing operation. Today, Bontex, Inc. ("Bontex" or
the "Company") 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) 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 marketing organizations at Bontex de Mexico, S.A. de C.V., in Leon, Mexico,
Bontex Vietnam, Hochiminh City Vietnam, 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 as an
insole and vamp lining. 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)                 CONTOUR(R)
MORIMER(R)            SURTEX(R)                  BONTEX(R)RECYCLED


Bontex is continuing to embark on repositioning the Company to manufacture and
supply a range of advanced material systems to both footwear and non-footwear
applications. During the previous three years, the Company has successfully
introduced several new products, and during the next year, the Company
anticipates introducing several additional new products.


                                        2

<PAGE>



MESSAGE TO SHAREHOLDERS
(Bontex Symbol) BONTEX [R]                  ONE BONTEX DRIVE
                                            BUENA VISTA, VIRGINIA 24416-1500
                                            email: bontex@bontex.com
                                            http://www.bontex.com

Dear Fellow Shareholder:

As I write this letter, Bontex continues to work through one of the most
challenging periods in the history of the Company. I am pleased to report that
much progress has been made, and we are optimistic that fiscal 2002 will be a
pivotal year in returning Bontex to profitability, but much work remains ahead
of us. Our management team is committed to working aggressively to address the
operating losses and their impact on our financial position. We will continue to
evaluate all of our business strategies and we will take the necessary measures
considered appropriate to ensure the long-term success and profitability of
Bontex.

We are not pleased with the losses incurred by Bontex, and my message to
shareholders continues to focus on our efforts to return the Company to
profitability. Therefore, I will refer you to our Management's Discussion and
Analysis for further comments regarding the Company's financial performance and
the detailed description of the challenging operating conditions confronting
Bontex.

In the near term, our returning to profitability depends on increasing sales of
our core products and adjusting our cost structure so that Bontex can compete as
a low-cost supplier of quality elastomeric wet web fiberboard products. As
outlined in my letter to you last year, after an analysis of our business model
for the past fifty years, we realized that the long-term success of the Company
depends on changing into a multi-dimensional company. This entails an inherently
long process that requires the engagement of the entire Company. We are well
into the process and we remain focused on our key initiatives, but this major
effort will take much time.

We have been able to increase sales, in spite of the highly competitive
environment in which the Company operates, through our focused efforts to
maintain existing specification customers, add new specification and non-
specification customers, and bring new products to the marketplace. Our sales
volume increased by 17% this year, as compared to a 7% increase in volume last
year. We are confident that this momentum in sales will continue, as we remained
focused on all our sales initiatives.

In addressing our cost structure, we continue to implement several measures that
will contain costs, including new technologies for process controls and
formulation in manufacturing, purchase commitments for primary raw materials
with "partner" suppliers, which contribute to added stability in our purchase
prices as well as secure adequate raw materials, reorganize and stream-line our
sales network operations, staff reductions and other cost cutting measures. We
expect when all these measures are fully implemented and realized, these efforts
should contribute significantly to our annualized cost reductions.

Today, Bontex manufactures the highest quality products we have ever made, and
we will continue to be an improvement driven company. We are not only one of the
world's largest manufacturers and distributors of cellulose and nonwoven
insoling materials to the footwear industry, but we can boast that we are the
global leader in supplying these products to the high-end market segment of our
industry. We are also the leader in quality products, as supported by being the
first global manufacturer in our industry to be ISO 9001 with the SATRA Quality
Mark and a SATRA Accredited Laboratory.

We cannot simply maintain our position in the footwear industry. It is crucial
to increase our sales in order to provide a revenue and profit base from which
to build upon for both footwear and non-footwear products. During the past two
years, we have successfully increased our market share in our core footwear
business relative to the overall market and relative to our primary global
competitors through the introduction of our new products. Our new footwear
products, including our Bontex 90 Seat-board and Bon-Stitch nonwoven materials,
contributed over $2.0 million in sales last year. Furthermore, the introduction
of a range of economical cellulose products, the largest market segment for
Bontex type products, increased sales volume and contributed to better capacity
utilization. The positive effects of greater economies are expected to enhance
our competitive position in the future, especially with Bontex SA, our
production facility in Belgium, which we regard as the highest capacity and most
efficient factory in our industry worldwide. These sales increases were
partially offset by the aggressive pricing of our primary global competitor,
which has been costly to Bontex over the past few years. In spite of this
competitive situation, we have not lost any major specification accounts, but
the reduction in pricing and operating profits has been significant.

Our efforts to develop new non-footwear products also remain an important
priority. Although much progress has been made, significant work continues to be
ahead of us in order to develop new and viable specialty materials. We will
continue to utilize consultants with the technical knowledge to enable Bontex to
develop these new materials. The emphasis on increasing sales for the Company,
especially with Bontex USA, is an important priority, because the contraction of
the US domestic market has resulted in a loss of an important volume of this
business for the Company. As with all manufacturers, Bontex is volume sensitive,
and the lower the volume, the higher our per unit costs. Sales from new products
combined with cost cutting measures will be crucial to the profitability of the
Company.

Prior to closing my letter, a major event of historical significance has
occurred, which will affect Bontex and much of the world. The United States of
America has been attacked by terrorists with the devastation at the World Trade
Center in New York and the Pentagon near Washington DC. The ramifications of
these atrocities will be significant. We cannot predict with any certainty the
full ultimate impact on Bontex or on us as individuals, but the world we all
live in will be changed by this defining moment and tragedy. We can report that
Bontex has not yet been directly affected, but we will eventually work through
the resulting adversities. Our thoughts and prayers are with the victims of
these horrendous and unprecedented attacks.

We greatly appreciate our shareholders' support of our efforts to develop Bontex
into a more diverse company, as well as the commitment and invaluable role of
our Board of Directors, employees and distributors globally, and the loyalty and
trust from our customers.

s/James C. Kostelni
James C. Kostelni
Chairman and Chief Executive Officer

See accompanying safe harbor disclosure on page 5

------------------------------------------------------------------------------
           Bontex, Inc., Bontex SA (Belgium), Bontex S.r.l. (Italy),
               Bontex Hong Kong, Bontex de Mexico, Bontex Vietnam

                                        3

<PAGE>
<TABLE>
<CAPTION>

BONTEX, INC. AND SUBSIDIARIES
Summary of Selected Ten Year Data1
(In Thousands, Except Per Share Data and Ratios)

                                                                      YEARS ENDED JUNE 30,

                                2001      2000       1999      1998      1997      1996      1995       1994      1993      1992
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Net sales                    $  42,504  $ 39,455  $  39,325  $ 43,483  $ 50,333 $  47,618  $ 50,998  $  47,729 $  46,710  $ 46,534
                              ========   =======   ========  ========  ========   =======   =======   ========  ========  ========

Income (loss) before
   cumulative effect of
   change in accounting
   principles                $  (1,526) $   (659) $    (778) $   (446) $  1,733 $    (602) $ (1,458) $     935 $     193  $    942

Cumulative effect of
   change in accounting
   principles                        -         -          -         -         -         -         -        400         -         -
                              --------   -------   --------  --------  --------   -------   -------   --------  --------  --------

Net income (loss)            $  (1,526) $   (659) $    (778) $   (446) $  1,733 $    (602) $ (1,458) $   1,335 $     193  $    942
                              ========   =======   ========  ========  ========   =======   =======   ========  ========  ========

Income (loss) per share:
Before cumulative effect
   of change in accounting
   principles                $    (.97) $   (.42) $    (.49) $   (.28) $   1.10 $    (.38) $   (.93) $     .60 $     .12  $    .60

Cumulative effect of change
   in accounting principles          -         -          -         -         -         -         -        .25         -         -
                              --------   -------   --------  --------  --------   -------   -------   --------  --------  --------

Net income (loss)            $    (.97) $   (.42) $    (.49) $   (.28) $   1.10 $    (.38) $   (.93) $     .85 $     .12  $    .60
                              ========   =======   ========  ========  ========   =======   =======   ========  ========  ========

Total assets                 $  27,439  $ 30,885  $  31,164  $ 32,513  $ 32,906 $  33,181  $ 39,527  $  31,032 $  28,840  $ 28,669

Total stockholders' equity   $   6,975  $  8,948  $   9,893  $ 10,891  $ 11,515 $  10,308  $ 11,186  $  12,080 $  10,521  $ 10,825

Capital expenditures         $     747  $    854  $   1,067  $  2,334  $  2,389 $   2,157  $  1,704  $   1,868 $   1,226  $  1,787

Cash flows provided by
   (used in) operating
   activities                $    (774) $  1,608  $     122  $     57  $  3,037 $   1,180  $ (2,073) $   1,078 $    (122) $    215

Long-term debt,
   noncurrent                $   1,568  $  2,327  $   2,601  $  2,256  $  2,761 $   2,330  $  1,364  $   1,511 $   1,056  $  1,493

Book value per share         $    4.43  $   5.69  $    6.29  $   6.92  $   7.32 $    6.55  $   7.11  $    7.68 $    6.69  $   6.88

Cash dividends per
   common share              $       -  $      -  $       -  $      -  $      - $       -  $      -  $       - $     .05  $      -

Current ratio                      .94       .98       1.02      1.05      1.16      1.06      1.07       1.30      1.26      1.34

Total debt to equity ratio        2.93      2.45       2.15      1.99      1.86      2.22      2.53       1.57      1.74      1.65
</TABLE>

                         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 10, 2001 there
were approximately 688 stockholders of record. No cash dividends were declared
or paid during fiscal years 1997 through 2001.

<TABLE>
<CAPTION>
                           2001                     2000                  1999                   1998                   1997
                          -------                  ------                 -----                  -----                 ------
                     HIGH         Low        High         Low       High         Low       High        Low       High         Low
                    ------       ------    --------      -----     -------      -----     ------      ------    -------      -----
<S>     <C>    <C>    <C>    <C>    <C>    <C>
First Quarter     $   2.25      $  1.75   $    2.75     $ 1.75    $   3.38    $  2.25    $  9.63     $  4.25   $   4.00     $ 3.13
Second Quarter        2.00         1.25        2.63       1.50        2.62       1.50       8.50        4.50       5.13       3.50
Third Quarter         3.37         1.25        5.47       1.75        4.00       1.00       5.25        3.25       5.38       4.50
Fourth Quarter        2.70         1.75        3.75       1.75        3.00       1.50       4.25        2.88       5.00       4.25
</TABLE>

                                        4

<PAGE>



                          BONTEX, INC. AND SUBSIDIARIES
                      MANAGEMENT'S DISCUSSION AND ANALYSIS

GENERAL

The Company's consolidated financial statements and notes to the consolidated
financial statements should be read as an integral part of this discussion.
Except for historical data set forth herein, the following discussion contains
forward-looking statements within the meaning of the Private Securities
Litigation Act of 1995. Forward-looking statements include, without limitation,
statements about financing plans, cash flows, availability of capital, growth
opportunities, benefits from new technologies, financial condition, capital
expenditures, future results of operations or market conditions and involve
certain risks, uncertainties and assumptions. The words "estimate," "project,"
"intend," "expect," "believe," and similar expressions are intended to identify
forward-looking statements. These and other forward-looking statements are found
at various places throughout this report, and you are cautioned not to place
undue reliance on these forward-looking statements. These forward-looking
statements should, therefore, be considered in light of various relevant
factors. Actual results may differ materially from these forward-looking
statements. Factors that could cause or contribute to those differences include,
but are not limited to, excessive worldwide footwear inventories, a shrinking
U.S. domestic market for Bontex products, decreased sales to key customers,
increased competition from non-woven materials, the reduction of prices by
competitors, the increase in the relative price of Bontex's products due to
foreign currency devaluations, increased pulp and latex prices, capital
illiquidity, unexpected foreign tax liabilities, the impact of any unusual items
resulting from ongoing evaluations of the Company's business strategies,
decreases in the Company's borrowing base, trading of Bontex common stock at a
level where closing bid prices are too low to remain listed on the Nasdaq
SmallCap Market, increased funding requirements for the Company's pension plan,
inability to recover deferred tax assets, an inability by Bontex to renew its
current credit facilities or obtain alternative financing, a market shift in
demand from higher-quality products to more economical grade products with lower
profit margins, higher energy prices, and increased costs of complying with
environmental laws, and the impact of changes in political, economic or other
factors, legal and regulatory changes or other external factors over which the
Company has no control.

RESULTS OF OPERATIONS

                                    OVERVIEW

Bontex, Inc. is one of the world's largest global manufacturers and distributors
of elastomeric wet web fiberboard products and nonwoven materials primarily used
as an insole material in footwear and as a stiffener or laminating base in
luggage and leather good applications. Management believes Bontex is the global
leader in manufacturing and supplying such quality component materials to the
high-end market segment, and furthermore, Bontex has one of the largest customer
bases in the world for its industry. During fiscal 2001, management estimates
the Company's overall market share increased relative to the Company's primary
global competitors, and management believes this momentum for improving market
position will continue. However, the increases in sales and sales volumes were
not enough to offset the increases in costs and other negative operating
conditions.

The following discussion and analysis describes continued challenging operating
conditions. The increase in operating losses can be attributed to a number of
factors, including increased competition resulting in reduced prices for the
Company's products, a major market shift from higher quality materials and
composite packages to more economical grade products with lower gross profit
margins, higher costs for primary raw materials, including pulps and latex, a
declining U.S. domestic market for our core footwear products, and the usage of
nonwoven materials as an insole material. In spite of the increased losses,
Bontex has taken steps to mitigate higher raw materials and operating costs, for
which the positive effects are expected to be

                                        5

<PAGE>



realized during the next fiscal year. Management maintains positive expectations
for improved profitability because of lower raw material costs, higher sales and
improved profit margins through the use of improved technologies, formulations
and process controls.

Sales of recently introduced new footwear products showed promise during the
year, but there can be no assurances that these new products, or other new
non-footwear products nearing the marketability stage, will contribute
significantly to the Company's sales volume. It is not possible to accurately
predict the viability of any of these products at this time, but Bontex has
embarked on a major effort to identify, develop and promote a more broad range
of advanced materials and technologies for domestic and export to footwear and
non-footwear industries.

                                      SALES

Consolidated net sales were $42.5 million, $39.5 million, and $39.3 million, for
fiscal years 2001, 2000, and 1999, respectively. If the foreign currency
exchange rates had remained unchanged from last year to the current year,
consolidated net sales would have increased instead by $6.6 million or almost
17%, to $46 million, reflecting higher sales volumes. In other words, the
increase in the value of the US dollar relative to the Euro during fiscal 2001
resulted in a $3.6 million translation decrease in net sales. For the prior
year, there was a $2.6 million translation decrease in consolidated net sales in
comparing 2000 to 1999.

In spite of significant competition, Bontex has successfully increased the
Company's overall market share and strengthened the Company's position in
specification footwear sales, as well as increasing non-specification sales.
Management considers specification sales to be sales to those branded footwear
customers who specify Bontex materials to their contract factories.
Non-specification sales are sales to those customers who do not specifically
request Bontex products be used by their contract factories in the manufacturing
of their footwear products. Competitive pricing pressures, especially from the
Company's primary global competitor, have significantly reduced the Company's
prices and operating profits to a number of key specification accounts.
Management believes Bontex has not lost any specification accounts due to this
price competition, but there has been a significant cost and there is no
assurance that such competitive pricing will not further adversely affect the
Company's future sales and profitability.

The cellulose insole market continues to be affected by competition from
nonwoven materials and low quality products, especially in Far East markets. For
instance, there is an over-supply and over-capacity of low quality materials,
especially acute in China, which creates downward pressure on prices. Although
most of these low-end producers are not in direct competition with Bontex, their
impact on the market is pervasive. Bontex continues to allocate increased
resources to the Company's marketing network in China, Vietnam and Thailand.
Management has reorganized the Company's personnel and added staff in key areas
in order to continue the momentum initiated in previous years in these
increasingly important markets.

Bontex has successfully introduced a range of quality economical products in
response to competition from lower priced products, the largest market segment
for cellulose insole products. These lower priced quality Bontex products have
lower profit margins than the Company's high-end products, but contribute
positively to capacity utilization, because these products are high volume. In
addition, because Bontex believes the Company's factory in Belgium is the
world's most efficient and highest capacity machine, management believes Bontex
can profit from these lower-margin high volume products. Bontex has made
significant efforts to maintain as high prices as possible, but the competitive
nature of such commodity products has resulted in the increased volume of these
economical products.

Over the past several years, sales of Bontex cellulose insole products,
particularly to the athletic category, have also declined because of the trend
of increased usage of nonwoven insole materials, an alternative material and
construction to cellulose board lasted construction. Nonwoven insole materials
are used mainly in force last or strobel-stitch applications, whereas Bontex
cellulose products are mainly used in cement or

                                        6

<PAGE>



board lasted construction. The overall volume of nonwoven strobel constructed
footwear has leveled off, and management believes board lasted footwear remains
the predominant insole material and construction worldwide. As part of the
Company's sales initiatives, Bontex has recently introduced a range of new
nonwoven insole materials and linings, marketed under the Bontex trade name,
Bon-Stitch, which are sourced from other manufacturers to further expand the
Company's product base.

Also during the prior year, sales of the Company's recently introduced Bontex 90
Seat-board (patent pending) product continue to develop for high-end
applications, such as golf, soccer and other footwear applications requiring a
tuck-board. In 2001, sales of these new seat-board and nonwoven products totaled
over $2.1 million. Because Bontex does not manufacture these nonwoven products,
the Company's costing and prices are such that the Company's per unit margins
are relatively low as compared to the Company's manufactured products, which has
a tendency to lower the Company's overall margins. However, since the added cost
of marketing these products is not considered to be significantly more, the
Company's strategy is to have high volumes so that these added sales contribute
positively to covering overhead costs and to the Company's overall profits.

Bontex has an aggressive strategy to locate complimentary products and advanced
technologies and rapidly bring them to the marketplace. Sales from a number of
these new projects were expected to occur during fiscal year 2001, but
development was slower than anticipated. To date, the Company has incurred a
minor amount of research and development expenses related to development of
these new products. It is impossible to accurately predict the level of sales
potential or profitability at this time. However, management expects one or more
of these projects to generate sales during fiscal year 2002.

                                      COSTS

The increases in sales were not enough to offset the impact of higher costs:
Cost of sales as a percent of net sales were 76.4 percent in 2001, 72.5 percent
of net sales in 2000, and 74.1 percent of net sales in 1999. Overall, gross
profits (net sales less cost of sales) declined from $10,857,000 in 2000 to
$10,051,000 in 2001, a decrease of $806,000. The increase in costs and lower
profit margins from 2000 to 2001 can be attributed mainly to higher raw material
costs, especially pulp and latex, competitive pricing pressures lowering selling
prices, lower priced product mix, including less converted or laminated products
and more sourced and economical products, and higher operating costs, including
higher natural gas prices used to generate steam for production, and higher
costs for waste water treatment processing. For example, higher raw material
costs in 2001 translated to an increase in operating costs and reduced operating
income of over $1.6 million relative to 2000. However, several of the Company's
cost control measures and higher sales volumes abated some of the higher raw
material costs. The decrease in costs as a percentage of sales from 1999 to 2000
was mainly due to lower raw material costs, improved efficiency from prior
investments and other cost control measures taken by management.

The Company has entered into a number of purchase commitments for certain
commodities, including pulp, latex and natural gas, for future manufacturing
requirements in an effort to manage the effects of market price fluctuations and
to secure adequate raw material supplies. If these purchase commitments for pulp
and latex had been in effect during all of 2001, the Company would have had
lower raw material prices. However, there is no guarantee that these purchase
commitments will result in lower purchase prices for the Company. To the extent
that these purchase commitments obligate the Company to purchase pulp, latex and
natural gas at higher than prevailing market prices, they could result in higher
costs.

The Company's United States operations use the last in, first out (LIFO) method
of inventory accounting. If the first-in, first-out, (FIFO) method of accounting
had been used, reported gross profit would have been higher by $101,000 in 2001,
higher by $28,000 in 2000, and lower by $93,000 in 1999. Net income would have
been higher by $61,000 or $0.04 per share in 2001, higher by $18,000 or $.01 per
share in 2000, and lower by $60,000 or $.04 per share in 1999.

                                        7

<PAGE>




Footwear production in North America continued to decline as more companies
closed domestic production facilities in favor of lower labor cost markets such
as China. While Bontex has a strong export program, selling and third party
costs tend to be higher for exports than for domestic sales. The Company
continues to pursue opportunities for footwear and non-footwear sales in the
United States.

As a percent of net sales, selling, general and administrative (SG&A) expenses
over the previous three years were 24.9 percent in 2001, 26.1 percent in 2000,
and 26.0 percent in 1999. The lower SG&A percentage in 2001 as compared to 2000
reflects sales increasing at a higher rate than related costs because of the
Company's continued efforts to control costs. In 2000 and 1999, the higher SG&A
percentages were mainly due to lower sales volumes, and higher costs, due to
among other things, higher legal costs associated with certain lawsuits against
the Company and some of its officers. These legal expenses did not recur in this
magnitude during 2000, but increased shipping costs, the addition of new sales
employees, and other related selling and marketing costs kept the SG&A
percentage from declining in 2000 relative to 1999.

The impact of the cost structure described above resulted in operating income
reversing from an operating income of $564,000 during 2000 to an operating loss
of $541,000 for 2001. Decreases in profitability occurred at both Bontex USA and
Bontex Belgium, but the largest portion of the operating losses was with Bontex
USA. Over the past several years, the volume of business for Bontex USA has
declined considerably because of several factors, including a contracting US
domestic market. This decline in sales combined with competitive pricing
pressures and higher operating costs for, among other things, raw materials,
resulted in much higher operating losses. Management has implemented several
initiatives as described in this discussion and analysis to address this
situation, and progress has been made to reduce costs and increase sales, but
there is no assurance that these steps will return Bontex USA to profitability.

Interest expense remained relatively stable from 2000 to 2001, because the
decline in interest rates during the year was offset by the increases in
borrowing to fund higher sales and operating losses. The decrease in interest
expense from 1999 to 2000 was due primarily to a decrease in long and short-term
borrowing because of lower sales, which was offset somewhat by higher interest
rates.

The consolidated income tax expense for the Company was $901,000 in 2001, as
compared to an income tax expense of $335,000 in 2000 and an income tax benefit
of $208,000 in 1999. The income tax expense in 2001 is primarily due to the
recording of a valuation allowance for the deferred tax assets of Bontex USA.
Based on the evaluation of relevant factors, including the recurring losses at
Bontex USA over the past several years, a valuation allowance of $1,022,000 was
recorded at June 30, 2001. The income tax expense in 2000 was significantly
higher than 1999 due to a $239,000 tax accrual established with respect to a
prior years tax examination of one of the Company's foreign subsidiaries.

During fiscal year 2000, the Ministere Des Finances, the Belgian tax authority,
completed an examination of Bontex S.A.'s, the Company's Belgian subsidiary, tax
returns for 1997, 1998 and 1999 and extended the tax examination to 1995 and
1996 based on certain items. Bontex S.A. has received notices of proposed tax
adjustments to these tax returns. The proposed tax adjustments arise from items
that are considered disallowed expenses by tax authorities, including
commissions paid to certain distributors and clients, certain travel expenses
and various smaller items including allowances for doubtful receivables and
certain insurance premiums. The proposed tax adjustments by the Belgian
authorities approximate $820,000. The Company believes, based in part on written
opinion of external counsel, it has meritorious legal defenses to many of the
claims and the Company intends to defend such claims. The Company's best
estimate of the most likely amount payable for the foregoing tax matters is
$239,000, (or 250,000 Euros, the local reporting currency for Bontex SA), and,
accordingly, a provision for this amount was accrued at June 30, 2000. The
accrual amount in Euros remained at 250,000 at June 30, 2001, but due to
fluctuations in the value of the Euro relative to the USA dollar, the amount
reported translates to $212,000 at June 30, 2001. Similar deductions relating to
the years ended June 30, 2001 and 2000 that in light of the current information
may be

                                        8

<PAGE>



disallowed have been treated as disallowed expenses in the calculation of those
year's tax provisions. The Company's actual liability pursuant to the foregoing
examination may exceed $212,000, and such excess liability could adversely
affect the Company's financial condition.

                                  PROFITABILITY

The net loss of $1.5 million or $0.97 per share incurred in 2001 compares
unfavorably to $659,000 or $0.42 per share net loss in 2000, and to the loss of
$778,000 or $0.49 per share in 1999. The net loss during 2001 would have been
higher by $482,000; however, during the year Bontex, Inc. sold the Company's
warehouse facility in Newark, New Jersey, and recorded in Other Income/Expense -
net a one-time gain of $803,000 or net gain of approximately $482,000 after
considering the impact of taxes. Additionally, as previously described, the
recording of the valuation allowance for deferred income tax assets of Bontex
USA increased the current year net loss by $1,022,000.

Management is working aggressively to reverse these unprofitable results. The
coming year will be a pivotal year, and management will continually evaluate the
Company's business strategies and all options, and if, circumstances warrant,
management will take the necessary measures considered appropriate for the
Company's long-term profitability.

Historically, the financial performance of Bontex has been directly related to
cycles in key raw materials, particularly pulp and latex. However, over the past
few years, higher raw material costs combined with the lower sales volumes of
the Company's Bontex cellulose materials, particularly for Bontex USA, have
resulted in especially negative operating conditions. Management continues to
pursue several measures, including process controls and formulation
efficiencies, to better enable the Company to cope with fluctuations in volume
and raw material costs in the future, as well as several initiatives to increase
sales. However, as previously noted, selling price reductions due to the
Company's competitive situation have offset a large portion of the Company's
cost reductions. Management remains optimistic for the future, but there can be
no assurances that increased raw materials prices or decreased volume of sales
will not have an on-going adverse impact on the Company's operations or
competitive position in the future.

INTERNATIONAL SALES AND OPERATIONS

Bontex continues to export a predominant portion of its production to countries
globally, especially to the Far East, where an estimated 70 percent of global
shoe production occurs. For instance, China is the single largest market in the
world for Bontex type products, as it is estimated that approximately half of
the world's footwear is manufactured in China. The Company's sales to the Far
East are denominated in US dollars, which serves to limit the Company's exposure
to foreign currency exchange gains and losses. However, there remains some
foreign currency exchange exposure for the Company's sales in that Bontex USA
continues to have limited level of sales denominated in other currencies, mostly
with the Mexican peso and Canadian dollar. The exchange losses during 2001 and
1999 are mainly due to declines in value of the Mexican peso, Canadian dollar
and the overall strength of the US dollar during that period. The relative
strength of the US dollar makes Bontex products more expensive than locally
sourced materials abroad, which has an adverse impact on the Company's
competitive position.

Bontex remains an international company. Almost 90 percent of the Company's
sales are to customers outside of the United States, with Asia/Pacific
representing over 48 percent of net sales. Europe and Middle East markets
represent the next largest markets for Bontex products, representing
approximately 32 percent of net sales. Furthermore, almost 60 percent of the
Company's manufacturing is outside of the United States. No one customer
represents more than 10 percent of the Company's total sales, and we have an
extensive customer base.



                                        9

<PAGE>



LIQUIDITY AND CAPITAL RESOURCES

The Company's liquidity and capital resources have decreased significantly over
the past few years, due to net losses and investments in capital and 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.

EBITDA, defined as operating income plus depreciation and amortization, is
considered a primary measure of the Company's ability to generate cash flow.
EBITDA remained positive but decreased from $1,886,000 in 2000 to $758,000 in
2001, mainly because of the operating losses. EBITDA margin, defined as EBITDA
as a percent of net sales, was 1.8 percent in 2001, 4.8 percent in 2000 and 3.4
percent in 1999. The decline in EBITDA margin from 2000 to 2001 was mainly due
to decreased profitability and increase in net sales, and the improvement in
EBITDA margin from 1999 to 2000 was primarily due to the growth in operating
income, partially offset by increases in sales.

Cash flows provided by (used in) operations totaled $(774,000), $1.6 million,
and $122,000 in 2001, 2000 and 1999, respectively. Operating cash flows were
adversely affected by higher costs, reflected in proportionately higher payments
to suppliers, higher inventory balances, and decreases in accounts payables and
accrued expenses, which were partially offset by a decrease in trade
receivables. In 2000, operating cash flows were primarily due to an increase in
accounts payable and accrued expenses, which was partially offset by an increase
in accounts receivable and other receivables. In 1999, operating cash flows were
mainly due to reductions in inventory. Trade accounts receivable decreased $1.5
million to $10.7 million at June 30, 2001, as compared to last year due
primarily to improved collections and aging, as well as a decrease due to
fluctuations in foreign currencies resulting in a translation decrease of
approximately $800,000. Inventories at June 30, 2001 are lower by $21,000
compared to 2000 balances due mainly to increased efforts to improve turnover
and global stock requirements, as well as a foreign currency translation
decrease. The Company's cash conversion efficiency, cash flows from operations
divided by net sales, decreased from 4.1 percent in 2000 to (1.8) percent this
year, as compared to a cash conversion efficiency ratio of less than 1.0 percent
in 1999. The Company's current ratio has decreased slightly from .98 in 2000 to
 .94 this year, reflecting, among other things, funding of operating losses and
capital additions through current debt.

Capital expenditures for property, plant and equipment (PP&E) totaled $747,000
in 2001, $854,000 in 2000 and $1.1 million in 1999. The PP&E additions reflect
the Company's commitment to invest in new technologies so that the Company can
remain a global leader in manufacturing the highest quality products at the
lowest cost. Competition is principally based on price, delivery and quality,
and the Company's future success will depend on the Company's ability to
maintain the Company's leadership position and to anticipate and to respond to
various competitive factors affecting the industry, including pricing
strategies, environmental mandates, and other such market trends. Capital
expenditures in 2001 were lower than prior years due to controls to limit costs
in this area. Through targeted capital and other investments, the Company
believes that Bontex Belgium's facility has developed into one of the most
efficient and highest capacity operation of its type in the world. Bontex USA
has invested in facility improvements that further enhance its reliability as a
supplier to the markets the Company serves.

Bontex has also invested heavily in environmental equipment at both
manufacturing facilities to protect the environment and help ensure compliance
with government mandates. Future capital investments will primarily relate to
non-recurring items in process controls to improve production efficiencies and
the environment. These projects are expected to help maintain Bontex as an
industry leader in quality, efficiency, and reliability.

As previously discussed, Bontex sold the Company's Newark, New Jersey warehouse
facility during 2001, for proceeds of $863,000 resulting in a gain of $803,000
(after tax gain of $482,000). The proceeds from this

                                       10

<PAGE>



sale were utilized for operations and repayment of debt. Bontex continues to
service its customers in the New York metropolitan area from a leased office and
warehouse.

On June 30, 2001, the Company had loans of $10.9 million outstanding consisting
of $8.8 million short-term and $2.1 million long-term. The $537,000 increase in
short-term borrowings principally corresponds to the $1 million decrease in
accounts payable and accrued expenses and the funding of operating losses, which
was partially offset by decreases in receivables. The weighted average interest
rate on short-term borrowings during 2001 and 2000 was 6.6 and 7.3 percent,
respectively. Financial instruments and market risk are discussed in more detail
below under Market Risk and Sensitivity.

On January 26, 2000, Bontex USA paid off and terminated its credit facility with
Wachovia Bank, N.A., and entered into a loan and security agreement with
Congress Financial Corporation/First Union providing for a secured credit
facility and a term loan. The new credit facility provides for a revolving loan
in an amount up to $4 million, based on a lending formula that evaluates, among
other items, the current accounts receivable and inventory of Bontex USA, which
are pledged as collateral in addition to certain non-current assets. The lending
availability fluctuates daily. Based on the lending formula, from the inception
of the loan through June 30, 2001, an average amount of approximately $3.1
million has been available and borrowed by Bontex USA under the revolving loan.
This credit facility with Congress expires in January 2002. Further, on five
days notice to Bontex USA, Congress may change the lending formula and in effect
reduce the amount available to Bontex USA under the revolving loan. The new
credit facility also requires Bontex USA to maintain a specified adjusted
tangible net worth. At June 30, 2001, Bontex USA was not in compliance with the
debt covenant ratio, but the Company subsequently received a waiver for the
non-compliance and a reset in the debt covenant ratio for which Bontex was
within compliance, as well as increase the Bontex USA's interest rate by 1% to a
rate of prime plus 2 percent. Management anticipates future compliance with the
revised debt covenant ratio, but there can be no assurance the Company will
remain in compliance. Bontex USA may not be able to renew its credit facility
with Congress or to obtain alternative financing on acceptable terms, which
could cause a material adverse impact on the Company's financial condition,
liquidity and/or results of operations. Please refer to Note 4 of Notes to the
Consolidated Financial Statements for further details regarding the Company's
indebtedness.

MARKET RISK AND SENSITIVITY

As previously discussed, the Company is exposed to certain risks related to
interest rates, foreign currencies 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. In general, the Company's policy
is not to speculate on interest rates, foreign currencies and commodities in the
markets. Fair Value of Financial Instruments (dollars in thousands):
<TABLE>
<CAPTION>


                                         FACE AMOUNT/                           Estimated
                                        CARRYING AMOUNT                        Fair Value
<S>     <C>    <C>    <C>    <C>    <C>    <C>
June 30, 2001
Interest Rate Exposure:
Long-term debt                         $           2,146                   $          2,023
Short-term debt                        $           8,788                   $          8,788

June 30, 2000
Interest Rate Exposure:
Long-term debt                         $           2,953                   $          2,695
Short-term debt                        $           8,251                   $          8,251

</TABLE>

                                       11

<PAGE>




The table below provides information about the Company's financial instruments
that are sensitive to changes in interest rates. For debt obligations, the table
presents principal cash flows and related weighted average interest rates by
expected maturity dates. Weighted average variable rates are based on implied
forward rates in the yield curve at the reporting date.

Financial instruments held for other than trading purposes at June 30, 2001
(dollars in thousands).
<TABLE>
<CAPTION>

                             EXPECTED MATURITY DATE


                                                                                      There-                     Estimated
                                 2002         2003         2004          2005         after        Total        Fair Value
<S>     <C>    <C>    <C>    <C>    <C>    <C>
LIABILITIES
Long-term debt:
     Fixed Rate                $   378      $   432      $   396       $   223      $    ---    $  1,429        $    1,306
     Average Interest Rate        5.99%        5.96%        5.96%         5.82%          ---        6.03%

     Variable Rate             $   200      $   200      $   200       $   117      $    ---    $    717        $      717
     Average Interest Rate        8.00%        8.00%        8.00%         8.00%          ---        8.00%
</TABLE>

At June 30, 2001, the Company had no outstanding interest rate swap agreements.
Therefore, approximately $9.5 million of variable rate debt is subject to the
risk of interest rate changes. Additionally, approximately $7.7 million of the
Company's debt is denominated in Euro, and because the Euro is the operating
currency for the Company's wholly-owned subsidiaries for which this debt
pertains, this debt is not considered subject to the market risk associated with
foreign currencies. The above market risk sensitivity analysis does not fully
reflect the potential net market risk exposure, because other market risk
exposures may exist in other transactions.

RECENT ACCOUNTING PRONOUNCEMENTS

In September 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -
A Replacement of FASB No. 125." This statement provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. The Company does not expect that the
adoption of SFAS No. 140 will have a material impact on the Company's results of
operations, financial position or cash flows.

In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets." Statement 141 specifies
criteria intangibles assets acquired in a purchase method business combination
must meet to be recognized and reported apart from goodwill. Statement 142 will
require that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but tested for impairment at least annually in accordance
with the provisions of Statement 142. Statement 142 will also require that
intangible assets with definite useful lives be amortized over their respective
estimated useful lives to their residual values, and reviewed for impairment in
accordance with Statement 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." The Company is required to
adopt the provisions of Statement 141 immediately, and Statement 142 is
effective July 1, 2002. The adoption of Statement 141 did not have a material
impact on the Company's results of operations, financial position or cash flows,
and the adoption of Statement 142 is not expected to have a material impact on
the Company's results of operations, financial position or cash flows.


                                       12

<PAGE>
<TABLE>
<CAPTION>



CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND
COMPREHENSIVE INCOME (LOSS) AND CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                    YEARS ENDED JUNE 30, 2001, 2000 AND 1999
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS):


                                                                             2001           2000           1999
<S>     <C>    <C>    <C>    <C>    <C>    <C>
NET SALES                                                                $     42,504    $    39,455   $     39,325
COST OF SALES                                                                  32,453         28,598         29,152
                                                                          -----------    -----------   ------------

     Gross Profit                                                              10,051         10,857         10,173

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                                   10,592         10,293         10,224
                                                                          -----------    -----------   ------------

     Operating income (loss)                                                     (541)           564            (51)
                                                                          -----------    -----------   ------------

OTHER (INCOME) EXPENSES:
     Interest expense                                                             853            834            923
     Interest income                                                               (8)            (2)            (3)
     Foreign currency exchange (gain) loss                                         28            (29)            40
     Other - net                                                                 (789)            85            (25)
                                                                          -----------    -----------   ------------
                                                                                   84            888            935
                                                                          -----------    -----------   ------------

LOSS BEFORE INCOME TAXES                                                         (625)          (324)          (986)

INCOME TAX EXPENSE (BENEFIT)                                                      901            335           (208)
                                                                          -----------    -----------   ------------

NET LOSS                                                                       (1,526)          (659)          (778)
                                                                          -----------    -----------   ------------

OTHER COMPREHENSIVE LOSS
     Foreign currency translation adjustment                                     (447)          (286)          (220)
                                                                          -----------    -----------   ------------

COMPREHENSIVE LOSS                                                       $     (1,973)   $      (945)  $       (998)
                                                                          ===========    ===========   ============

NET LOSS PER SHARE                                                       $       (.97)   $      (.42)  $       (.49)
                                                                          ===========    ===========   ============

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY:                  2001           2000           1999

Stockholders' Equity, beginning balance                                  $      8,948    $     9,893   $     10,891

Net loss                                                                       (1,526)          (659)          (778)

Other comprehensive loss
     Foreign currency translation adjustment                                     (447)          (286)          (220)
                                                                          -----------    -----------   ------------

Stockholders' Equity, ending balance                                     $      6,975    $     8,948   $      9,893
                                                                          ===========    ===========   ============
</TABLE>

See accompanying notes to consolidated financial statements

                                       13

<PAGE>
<TABLE>
<CAPTION>



BONTEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
                             JUNE 30, 2001 AND 2000
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

                                                                                            2001           2000
<S>     <C>    <C>    <C>    <C>    <C>    <C>
ASSETS
CURRENT ASSETS:
     Cash                                                                              $        320    $        457
     Trade accounts receivable, less allowance for doubtful
         accounts of $96 ($170 at 2000)                                                      10,700          12,187
     Other receivables                                                                          629             378
     Inventories                                                                              5,444           5,465
     Deferred income taxes                                                                       35             135
     Income taxes refundable                                                                      -              49
     Other current assets                                                                       166             120
                                                                                         ----------    ------------
                  Total current assets                                                       17,294          18,791
                                                                                         ----------    ------------

PROPERTY, PLANT AND EQUIPMENT:
     Land and land improvements                                                                 276             350
     Building and building improvements                                                       5,259           5,525
     Machinery, furniture and equipment                                                      17,691          17,797
     Construction in progress                                                                   387             526
                                                                                         ----------    ------------

     Less accumulated depreciation and amortization                                          14,020          13,491
                                                                                         ----------    ------------
     Net property, plant and equipment                                                        9,593          10,707

Deferred income taxes                                                                             -             736
Other assets, net                                                                               552             651
                                                                                         ----------    ------------
                  Total assets                                                         $     27,439    $     30,885
                                                                                         ==========    ============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
     Short-term borrowings                                                             $      8,788    $      8,251
     Long-term debt due currently                                                               578             626
     Accounts payable                                                                         6,808           7,756
     Accrued expenses                                                                         1,869           1,902
     Income taxes payable                                                                       368             594
                                                                                         ----------    ------------
                  Total current liabilities                                                  18,411          19,129

Long-term debt, less current portion                                                          1,568           2,327
Deferred income taxes                                                                             9              42
Other long-term liabilities                                                                     476             439
                                                                                         ----------    ------------
                  Total liabilities                                                          20,464          21,937
                                                                                         ----------    ------------

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                                                                        5,935           7,461
     Accumulated other comprehensive income                                                    (668)           (221)
                                                                                         ----------    ------------
                  Total stockholders' equity                                                  6,975           8,948
                                                                                         ----------    ------------
                  Total liabilities and stockholders' equity                           $     27,439    $     30,885
                                                                                         ==========    ============
</TABLE>

See accompanying notes to consolidated financial statements.

                                       14

<PAGE>
<TABLE>
<CAPTION>



BONTEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

                    YEARS ENDED JUNE 30, 2001, 2000 AND 1999
                                 (IN THOUSANDS)


                                                                             2001          2000            1999
<S>     <C>    <C>    <C>    <C>    <C>    <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers                                             $     42,968  $     37,378   $      39,152
Cash paid to suppliers and employees                                          (42,632)      (34,886)        (38,237)
Interest received                                                                   8             4              10
Interest paid                                                                    (843)         (814)           (931)
Income taxes received (paid), net                                                (275)          (74)            128
                                                                          -----------   -----------    ------------
                  Net cash provided by (used in) operating activities            (774)        1,608             122
                                                                          -----------   -----------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property, plant and equipment                              886             -               -
Purchases of property, plant and equipment                                       (747)         (854)         (1,067)
                                                                          -----------   -----------    ------------
                  Net cash provided by (used in) investing activities             139          (854)         (1,067)
                                                                          -----------   -----------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term borrowings, net                               1,133          (404)            898
Long-term debt incurred                                                             -           545             547
Principal payments on long-term debt                                             (617)         (752)           (669)
                                                                          -----------   -----------    ------------
                  Net cash provided by (used in) financing activities             516          (611)            776
                                                                          -----------   -----------    ------------

EFFECT OF EXCHANGE RATE CHANGES ON CASH                                           (18)          (22)            (12)
                                                                          -----------   -----------    ------------
NET INCREASE (DECREASE) IN CASH                                                  (137)          121            (181)

CASH AT BEGINNING OF YEAR                                                         457           336             517
                                                                          -----------   -----------    ------------

CASH AT END OF YEAR                                                      $        320  $        457   $         336
                                                                          ===========   ===========    ============

RECONCILIATION OF NET LOSS TO NET CASH
     PROVIDED BY (USED IN) OPERATING ACTIVITIES:
     Net loss                                                            $     (1,526) $       (659)  $        (778)
     Adjustments to reconcile net loss to net cash provided by
         (used in) operating activities:
         Depreciation and amortization                                          1,299         1,322           1,372
         Gain on sale of property, plant and equipment                           (803)            -               -
     Provision for bad debts                                                      (54)           92             (39)
     Deferred income taxes                                                        803          (154)           (191)
     Change in assets and liabilities:
         (Increase) decrease in trade accounts and other receivables              674        (1,226)           (522)
         (Increase) decrease in inventories                                      (537)           (5)            547
         (Increase) decrease in other assets                                     (113)         (186)            146
         Increase (decrease) in accounts payable and accrued
              expenses                                                           (394)        1,988            (367)
         Increase (decrease) in income taxes payable                             (175)          421             143
         Increase (decrease) in other liabilities                                  52            15            (189)
                                                                          -----------   -----------    ------------
     Net cash provided by (used in) operating activities                 $       (774) $      1,608   $         122
                                                                          ===========   ===========    ============

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
     Construction in progress accrued in accounts payable                $        115  $          -   $           -
                                                                          ===========   ===========    ============
</TABLE>

See accompanying notes to consolidated financial statements.

                                       15

<PAGE>



BONTEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                          JUNE 30, 2001, 2000 AND 1999
                  (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. 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. Depreciation and amortization are 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 sales terms.

STOCK OPTIONS - The Company uses the disclosure provisions of SFAS No. 123,
"Accounting for Stock Based Compensation" (Note 6). The Company continues to
measure compensation expense for its stock-based compensation plans using the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees."

EARNINGS PER SHARE - Net 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). Diluted earnings per share is not presented because the effect of stock
options is anti-dilutive. See note 6 for information relating to stock options
that could potentially dilute basic earnings per share in the future.


                                       16

<PAGE>



DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - When appropriate, the Company
enters into interest rate swap transactions to manage its interest rate
exposure, and on a limited basis, the Company has previously managed its
exposure to pulp price changes with pulp futures. 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. On July 1, 2000, the
Company adopted the provisions of this Statement. Since the Company did not have
any derivatives during 2001, there was no impact on the Company's financial
statements; however, the Company has used in the past and continues to consider
in the future the use of derivative instruments and hedging activities,
accordingly, this statement could have an impact on the Company's future
financial statements.

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.

USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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.

[2]      INVENTORIES

Cost of inventories of approximately $1,325 in 2001 and $1,873 in 2000, is
determined by the last-in, first-out method (LIFO). Replacement cost for LIFO
inventories approximated $1,740 in 2001 and $2,187 in 2000. Inventories of
approximately $4,119 in 2001 and $3,592 in 2000, are determined by the first-in,
first-out (FIFO) and weighted average bases. Inventories are summarized as
follows:
<TABLE>
<CAPTION>


                                                                 2001             2000
<S>     <C>    <C>    <C>    <C>    <C>    <C>
Finished goods                                               $     4,020      $     3,849
Raw materials                                                      1,180            1,222
Supplies                                                             659              708
                                                              ----------       ----------
Inventories at FIFO and weighted average cost                      5,859            5,779
LIFO reserves                                                        415              314
                                                              ----------       ----------

                                                             $     5,444      $     5,465
                                                              ==========       ==========
</TABLE>

During 2001 and 1999, LIFO layers were reduced resulting in charging lower
inventory costs to cost of sales of $57 and $255, respectively. In 2000, no LIFO
layers were reduced.


                                       17

<PAGE>



[3]      BUSINESS SEGMENT INFORMATION AND INTERNATIONAL OPERATIONS

Bontex, Inc. and all majority-owned subsidiaries are predominantly engaged in
one business segment with the manufacturing and distribution of uncoated and
coated BONTEX(R) elastomeric fiberboard products. The Company operates
manufacturing facilities at Bontex USA in North America and Bontex S.A. in
Belgium. BONTEX(R) 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.

Information related to net sales by geographic area follows:
<TABLE>
<CAPTION>


                   NORTH AMERICA        Asia/Pacific       Europe/Middle East      Latin America        Total
<S>     <C>    <C>    <C>    <C>    <C>    <C>

2001                 $   6,128           $   20,493            $   13,800            $   2,083       $   42,504
2000                     6,731               16,366                14,264                2,094           39,455
1999                     7,086               15,301                15,315                1,623           39,325
</TABLE>

No single customer accounts for 10 percent or more of the Company's consolidated
net sales for 2001, 2000 and 1999. One distributor accounted for 23.2 percent in
2001, 19.2 percent in 2000 and 15.2 percent in 1999 of the Company's
consolidated net sales.

Information related to the North American and European operations follows:
<TABLE>
<CAPTION>


                                            North American         European
                                              Operations          Operations       Eliminations       Consolidated
<S>     <C>    <C>    <C>    <C>    <C>    <C>
2001:
     Total assets                            $      13,792      $       15,726      $      (2,079)    $      27,439
     Net income (loss)                              (1,545)                 19                  -            (1,526)
     Operating income (loss)                        (1,470)                929                  -              (541)
     Net sales                                      16,880              26,028               (404)           42,504
     Interest expense                                  335                 518                  -               853
     Depreciation and amortization                     806                 493                  -             1,299
     Income tax expense                                839                  62                  -               901
     Total expenditures for additions to
         property, plant and equipment                 339                 408                  -               747


2000:
     Total assets                            $      16,046      $       16,904      $       2,065    $       30,885
     Net loss                                         (508)               (151)                 -              (659)
     Operating income (loss)                          (733)              1,297                  -               564
     Net sales                                      16,861              22,990               (396)           39,455
     Interest expense                                  372                 462                  -               834
     Depreciation and amortization                     815                 507                  -             1,322
     Income tax expense (benefit)                     (151)                486                  -               335
     Total expenditures for additions to
         property, plant and equipment                 381                 473                  -               854



                                       18

<PAGE>




1999:
     Total assets                            $      14,817      $       18,345      $      (1,998)   $       31,164
     Net income (loss)                                (829)                 51                  -              (778)
     Operating income (loss)                        (1,327)              1,276                  -               (51)
     Net sales                                      15,661              23,954               (290)           39,325
     Interest expense                                  308                 615                  -               923
     Depreciation and amortization                     794                 578                  -             1,372
     Income tax expense (benefit)                     (402)                194                  -              (208)
     Total expenditures for additions to
         property, plant and equipment                 389                 678                  -             1,067
</TABLE>

Retained earnings of foreign operations not available for distribution amounted
to approximately $243 and $757 at June 30, 2001 and 2000, respectively.

[4]      LONG-TERM DEBT AND FINANCING AGREEMENTS

The following long-term debt was outstanding as of June 30, 2001 and 2000:

<TABLE>
<CAPTION>

                                                                                        2001              2000
<S>     <C>    <C>    <C>    <C>    <C>    <C>
Loan payable to a United States bank in monthly installments of $17 through
     January 2005, at an interest rate of prime plus 1% (8% and 10.5% at June
     30, 2001 and 2000, respectively); collateralized by property and equipment
     located in the U.S. and subject to various loan covenants.                     $       717      $          917

4.70% loan payable to a Belgian bank in quarterly
     installments of $7 through June 2005.                                                  118                 166

4.70% loan payable to a Belgian bank in quarterly
     installments of $13 through June 2005.                                                 210                 296

5.20% loan payable to a Belgian bank in quarterly
     installments of $26 through June 2005.                                                 420                 592

5.50% loan payable to a Belgian bank in quarterly
     installments of $7 through June 2005.                                                  105                 148

5.85% loan payable to a Belgian bank in quarterly
     installments of $20 through June 2005.                                                 324                 455

3.95% loan payable to a Belgian bank in quarterly
     installments of $21 through April 2004.                                                252                 379
                                                                                     ----------       -------------
                                                                                          2,146               2,953

Less long-term debt due currently                                                           578                 626
                                                                                     ----------       -------------
Long-term debt                                                                      $     1,568      $        2,327
                                                                                     ==========       =============
</TABLE>


                                       19

<PAGE>



The principal payments of long-term debt are as follows:
<TABLE>
<CAPTION>

<S>     <C>    <C>    <C>    <C>    <C>    <C>
2002                                                             $       578
2003                                                                     632
2004                                                                     596
2005                                                                     340
                                                                  ----------
Total                                                            $     2,146
                                                                  ==========
</TABLE>

The loans payable to a Belgian bank 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
$6,824 and $7,186 at June 30, 2001 and 2000, respectively. As of June 30,
borrowings under these facilities were as follows:
<TABLE>
<CAPTION>


                                                                             2001            2000
<S>     <C>    <C>    <C>    <C>    <C>    <C>
Short-term bank loans with variable interest rates, ranging
     from 5.66% to 6.9% at June 30, 2001 and 4.77% to 7.45%
     at June 30, 2000                                                    $     6,263     $     5,100
Overdrafts                                                                         7               -
                                                                          ----------      ----------

                                                                         $     6,270     $     5,100
                                                                          ==========      ==========
</TABLE>

Three banks in Belgium share a security interest in most of the assets of Bontex
S.A. for 37.5 percent of the credit facilities granted, and the right to request
additional security interest of another 37.5 percent of the credit facilities
granted. As of June 30, 2001 and 2000, one of the banks under these facilities
had the right to request a security interest up to $1,051 and $1,184,
respectively. Bontex S.A. committed to one of the banks to maintain certain
covenants which were met at June 30, 2001.

Bontex USA has a line of credit arrangement whereby Bontex USA may borrow up to
$4,000 based on the value of certain assets, at prime plus 1.00 percent (8% at
June 30, 2001 and 10.5% at June 30, 2000). At June 30, 2001 and 2000, Bontex USA
had borrowings of $2,518 and $3,151, respectively, which is to the limit of
availability based on the lending formula. There was no additional available
credit on this facility at June 30, 2001 and 2000. The secured line of credit is
collateralized by trade accounts receivable, inventory and other noncurrent
assets.

Consolidated weighted average interest rates on short-term borrowings at June
30, 2001 and 2000 are 6.6 and 6.9 percent, respectively.

In January 2000, Bontex USA refinanced its previous long and short-term debt
with a new secured debt agreement. The short-term debt agreement is subject to
renewal and is scheduled to expire in January 2002. During 2001 and 2000, Bontex
USA was subject to various loan covenants under its secured debt agreements and
has pledged certain current and non-current assets as collateral. Bontex USA was
in compliance with the applicable debt covenants at June 30, 2000, but Bontex
USA was not in compliance with the applicable covenants at June 30, 2001. On
September 12, 2001, Bontex USA received a waiver for this noncompliance, and the
various debt covenants were reset to levels so that the Company was in
compliance, as well as increased the Company's interest rate by 1 percent to
prime plus 2 percent.


                                       20

<PAGE>



[5]      INCOME TAXES

The U.S. and foreign components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>


                                                    CURRENT         Deferred           Total
<S>     <C>    <C>    <C>    <C>    <C>    <C>
2001:
     Federal                                    $          -      $       756      $       756
     State                                                 -               83               83
     Foreign                                              98              (36)              62
                                                  -----------      -----------       ----------

                                                $         98      $       803      $       901
                                                  ===========      ===========       ==========

2000:
     Federal                                    $          -      $      (136)     $      (136)
     State                                                 -              (15)             (15)
     Foreign                                             489               (3)             486
                                                  -----------      -----------       ----------

                                                $        489      $      (154)     $        335
                                                  ===========      ===========       ==========

1999:
     Federal                                    $       (151)     $      (210)     $      (361)
     State                                               (17)             (24)             (41)
     Foreign                                             151               43              194
                                                  -----------      -----------       ----------

                                                $        (17)     $      (191)     $      (208)
                                                  ===========      ===========       ==========
</TABLE>

Income tax expense (benefit) differs from the expected tax expense (benefit),
computed by applying the U.S. Federal corporate rate to loss before income
taxes, as follows:
<TABLE>
<CAPTION>


                                                          2001             2000              1999
<S>     <C>    <C>    <C>    <C>    <C>    <C>
Federal income tax at statutory rate (34%)           $       (213)    $       (110)      $     (334)
Increase (reduction) in income taxes
     resulting from:
     Foreign income at other than U.S. rates                   (1)              82               25
     State and local taxes, net of federal
         income tax benefit                                   (12)             (10)             (27)
     Valuation allowance                                    1,022                -                -
     Accrual for tax examination                                -              239                -
     Other differences, net                                   105              134              128
                                                       -----------      -----------       ----------

     Income tax expense (benefit)                    $        901     $        335       $     (208)
                                                       ===========      ===========       ==========
</TABLE>

During fiscal year 2000, the Ministere Des Finances, the Belgian tax authority,
completed an examination of Bontex S.A.'s, the Company's Belgian subsidiary, tax
returns for 1997, 1998 and 1999 and extended the tax examination to 1995 and
1996 based on certain items. Bontex S.A. has received notices of proposed tax
adjustments to these tax returns. The proposed tax adjustments arise from items
which are considered disallowed expenses by tax authorities, including
commissions paid to certain distributors and clients, certain travel expenses
and various smaller items including allowances for doubtful receivables and
certain insurance premiums. The proposed tax adjustments by the Belgian
authorities approximate $820,000. The Company believes, based in part on written
opinion of external counsel, it has meritorious legal defenses to many of the
claims and the Company intends to defend such claims. The Company's best
estimate of the most likely amount payable for the foregoing tax matters is
$239,000, (or 250,000 Euros, the local reporting currency

                                       21

<PAGE>



for Bontex SA), and accordingly, a provision for this amount has been accrued at
June 30, 2000. The accrual amount in Euros remained at 250,000 at June 30, 2001,
but due to fluctuations in the value of the Euro relative to the USA dollar, the
amount reported translates to $212,000 at June 30, 2001. Similar deductions
relating to the years ended June 30, 2001 and 2000 that in light of the current
information may be disallowed have been treated as disallowed expenses in the
calculation of those year's tax provisions.

The components of deferred tax assets and liabilities at June 30, 2001 and 2000
are presented below:
<TABLE>
<CAPTION>


                                                                                   2001             2000
<S>     <C>    <C>    <C>    <C>    <C>    <C>
Deferred tax assets:
     Accounts receivable, principally due to allowance
         for doubtful accounts                                                  $       22        $      15
     Inventories, principally due to additional costs capitalized for tax
          purposes                                                                     140              101
     Other assets, due to difference in amortization of Trademarks                     178              170
     Accrued pension and retirement benefits                                           142              117
     Net operating loss carryforwards                                                1,472            1,263
     Alternative minimum tax credit carryforwards                                       36               36
     Other                                                                              53               81
                                                                                 ---------       ----------
                  Total gross deferred tax assets                                    2,043            1,783
                                                                                 ---------       ----------
                  Less: Valuation allowance                                         (1,022)               -
                  Net deferred tax assets                                            1,021            1,783

Deferred tax liabilities:
     Plant and equipment, principally due to differences in depreciation
         and capital gain recognition                                                 (983)            (942)
     Other                                                                             (12)             (12)
                                                                                 ---------       ----------

                  Total gross deferred tax liabilities                                (995)            (954)
                                                                                 ---------       ----------

                  Net deferred tax asset                                        $       26        $     829
                                                                                 =========       ==========
</TABLE>

The U.S. and foreign components of the net deferred tax asset at June 30, 2001
and 2000 are presented below:

<TABLE>
<CAPTION>


                                       CURRENT                NONCURRENT                   TOTAL
<S>     <C>    <C>    <C>    <C>    <C>    <C>
2001:
     U.S. Operations                 $         -           $             -            $          -
     European Operations                      35                        (9)                     26
                                      ----------            ---------------             -----------

                                     $        35           $            (9)           $         26
                                      ==========            ===============             ===========

2000:
     U.S. Operations                 $       103           $           736            $        839
     European Operations                      32                       (42)                    (10)
                                      ----------            ---------------             -----------

                                     $       135           $           694            $        829
                                      ==========            ===============             ===========
</TABLE>

At June 30, 2001, in addition to an alternative minimum tax credit carryforward
of $36 at Bontex USA, the Company had approximately $4,123 at Bontex USA in net
operating loss carryforwards to offset future taxable income, of which $258,
$361, $851, $1,491, $512 and $650 at Bontex USA expire in 2010, 2011, 2013,
2019, 2020, and 2021, respectively.

                                       22

<PAGE>



At June 30, 2001, the Company has not recognized a deferred tax liability of
$106 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, 2001, undistributed income of the foreign subsidiaries
was approximately $1,969, of which approximately $243 is not available for
distribution.

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/losses, anticipation of future taxable income over the
periods for 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 not realize a portion of these
deferred tax assets. Accordingly, based on the evaluation of relevant factors, a
valuation allowance in the amount of $1,022 relating to the US component of the
deferred tax assets was recorded at June 30, 2001.

[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 contributory 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. Participant
contributions to the plan were 3.5 percent of employee annual earnings for
fiscal years ending June 30, 2001, 2000 and 1999. 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 the Company may determine to be appropriate
from time to time. Annual provisions for accrued pension costs are based on
independent actuarial valuations.

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>

                                                                               2001                        2000
<S>     <C>    <C>    <C>    <C>    <C>    <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation                                            $       4,778               $      4,491
                                                                           =============                ===========

CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year                                   $       5,271               $      5,240
Service cost                                                                        142                        111
Interest cost                                                                       404                        381
Plan participants' contributions                                                     71                         68
Actuarial (gain) loss                                                               227                        (91)
Benefits paid                                                                      (331)                      (438)
                                                                           -------------                -----------
Benefit obligation at end of year                                         $       5,784               $      5,271
                                                                           =============                ===========

CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year                            $       5,429               $      5,710
Actual return on plan assets                                                        204                         89
Plan participants' contributions                                                     71                         68
Benefits paid                                                                      (331)                      (438)
                                                                           -------------                -----------
Fair value of plan assets at end of year                                  $       5,373               $      5,429
                                                                           =============                ===========



                                       23

<PAGE>




Funded status                                                             $        (311)               $       158
Unrecognized net actuarial loss (gain)                                             (134)                      (533)
Unrecognized prior service cost                                                     103                        118
Unrecognized transition obligation                                                  (49)                       (65)
                                                                           -------------                -----------
Accrued benefit costs                                                     $        (391)               $      (322)
                                                                           =============                ===========
</TABLE>

The Company's net periodic benefit costs for its United States pension plan for
the years ended June 30, 2001, 2000 and 1999 include the following components:
<TABLE>
<CAPTION>


                                                                   2001                 2000                1999

<S>                                                            <C>                 <C>                  <C>
Service cost                                                   $        213        $         179        $        193
Interest cost                                                           404                  381                 384
Expected return on plan assets                                         (476)                (496)               (517)
Net amortization and deferral                                            (1)                 (29)                (20)
                                                                -----------          -----------         -----------
Net periodic benefit cost                                      $        140        $          35        $         40
                                                                ===========          ===========         ===========
</TABLE>

The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligations was 7.75 percent for 2001, 2000 and
1999. The rate of increase for future compensation levels used in determining
the obligation was 5.0 percent for 2001, 2000, and 1999. The expected long-term
rate of return on plan assets in 2001, 2000 and 1999 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, managed by the
insurance company, which include domestic equity, domestic government, corporate
and private placement bonds and domestic real estate equity.

The pension expense relating to the foreign subsidiary's insured pension and
disability plan amounted to $66, $96, and $62, in 2001, 2000, and 1999,
respectively. Benefits are based on years of service and the average of the last
five years annual earnings.

The Company provides certain supplemental retirement benefits to the President
of the Company. Expenses related to these benefits were approximately $49 in
1999. There was no expense for 2001 and 2000. 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.

The Company has granted stock options to certain key executives to purchase
shares of the Company's common stock. These options generally vest in six months
or less and expire 10 years from the grant date. Additional information with
respect to stock option activity is as follows:
<TABLE>
<CAPTION>


                                                                NUMBER           Weighted Average
                                                               OF SHARES          Exercise Price
<S>     <C>    <C>    <C>    <C>    <C>    <C>
Outstanding at June 30, 1998                                              -                -
         Granted during the year ended June 30, 1999                112,000               4.90
                                                            ---------------
Outstanding at June 30, 1999                                        112,000               4.90
         Granted during the year ended June 30, 2000                 59,997               2.00
         Cancelled during the year ended June 30, 2000              (60,000)              4.90
                                                            ---------------
Outstanding at June 30, 2000 and 2001                               111,997               3.35
                                                            ===============

Options exercisable at June 30, 2000                                 52,000               4.90
                                                            ===============

Options exercisable at June 30, 2001                                111,997               3.35
                                                            ===============
</TABLE>

                                       24

<PAGE>



The following table summarizes information about stock options outstanding and
exercisable at June 30, 2001:


                    STOCK OPTIONS OUTSTANDING AND EXERCISABLE:


                                            Weighted Average          Weighted
      Range of             Number of            Remaining              Average
      Exercise              Options            Contractual            Exercise
       Prices             Outstanding         Life in Years             Price

   $ 2.00 - $5.63           111,997               7.75          $       3.35

The Company applies APB Opinion No. 25 in accounting for its stock-based
compensation and, accordingly, no compensation cost has been recognized for its
stock options in the consolidated financial statements. Had compensation cost
for the stock options been determined consistent with SFAS No. 123, the
Company's net loss and net loss per share would have been increased to the pro
forma amounts shown below:


                                        2001             2000           1999
Net Loss:
As reported                          $    1,526       $     659      $     778
Pro forma                            $    1,526       $     709      $     826

Net Loss Per Share:
As Reported                          $      .97       $     .42      $     .49
Pro forma                            $      .97       $     .46      $     .52

The weighted average fair value of stock options granted during 2000 and 1999
was $1.29 and $.67 per share, respectively. These amounts were determined using
the Black-Scholes option-pricing model. The assumptions used in the model were
as follows for stock options granted in 2000 and 1999:


                                               2000              1999

Risk-free interest rate                        6.30%             5.93%
Expected volatility of common stock            55.3%             44.5%
Dividend yield                                    -                 -
Expected life of options in years                10          8 to 8.8

[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 has periodically used 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 - At June 30, 2001 and 2000, the Company had no outstanding
interest rate swap agreements. At June 30, 1999, the Company had one outstanding
interest rate swap agreement with a

                                       25

<PAGE>



bank having a notional amount of $1,000, which terminated January 20, 2000. This
swap agreement provided for the payment of interest based on a fixed rate of
6.35 percent, and remained unchanged over the term of the agreement. The
floating rate of the swap agreement was based on the London Inter Bank Offered
Rate (LIBOR) and was reset every 90 days based on market conditions. The nature
of the swap agreement changed variable rate debt to fixed rate debt. The
interest rate differential paid or received under the swap was recognized over
the term of the contract as adjustments are made to the effective yield of the
underlying debt. An interest premium of $6, and $44, was paid during 2000 and
1999, respectively.

As of June 30, 2001, approximately $9.5 million of variable rate debt is not
covered by interest rate swaps and is therefore subject to market risk of rate
changes.

COMMODITIES - The Company has periodically managed its exposure to pulp price
changes with pulp futures. During fiscal years 2001, 2000 and 1999 the Company
did not hold any related derivatives for pulp futures.

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 sheets 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
approximates $2,023 at June 30, 2001.

[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 permits. Except as described below, 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 or termination 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. Because 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, except as described below, the
Company believes to be operating within compliance of applicable environmental
requirements. Also, 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.

Bontex USA received a renewal of its 5-year wastewater discharge permit on April
2, 2001. The new permit requires the Company to expand its wastewater treatment
facility to increase the capacity of its equalization tank. The Company started
the expansion this Summer and expects to complete it by the end of the calendar
year. Prior to receiving the new permit, the Company had received a Notice of
Violation from the Virginia Department of Environmental Quality (DEQ). In
general, the DEQ stated in the Notice of Violation that it

                                       26

<PAGE>



had reason to believe that the Company's plant in Buena Vista, Virginia, might
be out of compliance with whole effluent toxics limits. In addition, the Company
has received a Notice of Violation from the DEQ alleging that in June 2001 the
Company's plant in Buena Vista, Virginia, discharged wastewater solids in
violation of Virginia law and/or the Company's wastewater discharge permit. The
Company has submitted detailed information to the DEQ relating to the Notices of
Violation. At this stage, it is too early for the Company to make a reasonable
estimate of the potential financial impact, if any, of these Notices of
Violation.

LITIGATION - 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, other than those discussed in
note 5 and this note 8 above, against or involving the Company that, in the
opinion of management, will have a material adverse impact upon the financial
condition of the Company.

PURCHASE COMMITMENTS - In connection with purchasing certain commodities (pulps,
latex and natural gas) 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 ranging from 1 to 5
years, and the Company expects future sales will be sufficient to meet these
requirements.

LEASES - Rental expenses for all operating leases amounted to $124, $106, and
$117 in 2001, 2000, and 1999 respectively. The Company anticipates future rental
expenses for operating leases to be no more than $130 each year for the next
five years.

[9]      QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of the unaudited quarterly results of operations for
the years ended June 30, 2001 and 2000:
<TABLE>
<CAPTION>


                                                                           QUARTER ENDED
                                                --------------------------------------------------------------------
<S>             <C> <C>                                    <C>              <C>             <C>              <C>
YEAR ENDED JUNE 30, 2001                         SEPTEMBER 30      DECEMBER 31        MARCH 31          JUNE 30

Net Sales                                      $         9,128   $       10,768    $     11,576      $    11,032
Gross Profit                                             2,135            2,520           2,659            2,737
Other (income) expense, net                                189             (558)            245              208
Income (loss) before income taxes                         (447)             383            (347)            (214)
Net Income (loss)                                         (290)             236            (233)          (1,239)
Income (loss) per common share                 $          (.18)  $          .15    $       (.15)     $      (.79)

                                                                           QUARTER ENDED
                                                --------------------------------------------------------------------
YEAR ENDED JUNE 30, 2000                         SEPTEMBER 30      DECEMBER 31        MARCH 31          JUNE 30

Net Sales                                      $         8,059   $        9,954    $     10,466      $    10,976
Gross Profit                                             1,921            2,677           2,960            3,299
Other expense, net                                         192              216             217              263
Income (loss) before income taxes                         (683)            (167)            107              419
Net Income (loss)                                         (539)            (111)             19              (28)
Income (loss) per common share                 $          (.34)  $         (.07)   $        .01      $      (.02)
</TABLE>

During the second quarter ended December 31, 2000, the Company sold its
warehouse facility in Newark, New Jersey resulting in a non-recurring gain
recorded in Other Income/Expense - net of $803 or a net gain of $482 or $0.31
per share after considering the impact of taxes. During the fourth quarter ended
June 30, 2001, the Company recorded a $1,022 valuation allowance for the
deferred income tax assets of Bontex USA, which increased the net loss by $1,022
or $0.65 per share.

                                       27

<PAGE>



INDEPENDENT AUDITORS' REPORT

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



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, 2001 and 2000, 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, 2001. 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 auditing standards generally accepted
in the United States of America. 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, 2001 and 2000, and the results of their operations
and their cash flows for each of the years in the three-year period ended June
30, 2001, in conformity with accounting principles generally accepted in the
United States of America.


                                         KPMG LLP

August 22, 2001, except
   as to note 4, which is as
   of September 12, 2001





                                       28

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

---------------------------------------------------
                   DIRECTORS, EXECUTIVES & OFFICERS
---------------------------------------------------

                                  James C. Kostelni +            Chairman of the Board, President,
                                                                      Chief Executive Officer and Director


                                  William J. Binnie +*           Director


                                  Michael J. Breton              Director of International Operations


                                William B. D'Surney              Director


                                       Douglas Hamm              Controller


                             Charles W. J. Kostelni              Senior Vice President, Corporate Controller,
                                                                      Corporate Secretary and Director


                                Jeffrey C. Kostelni              Senior Vice President, Treasurer,
                                                                      Chief Financial Officer and Director


                                  Frank B. Mayorshi +*           Director


                                     Hadelin Mothet              Financial Director and Director


                                Dr. Joseph Raffetto              Director


                                    Robert J. Weeks +*           Director

                                                                 +Member of Executive Committee
                                                                 *Member of Audit Committee

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

                 WOODS, ROGERS & HAZLEGROVE, P.L.C.
                                   Attorneys at Law              Roanoke, Virginia

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

                                           KPMG LLP
                       Certified Public Accountants              Roanoke, Virginia

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

                       REGISTRAR & TRANSFER COMPANY              Cranford, New Jersey
---------------------------------------------------
</TABLE>


                                       29

<PAGE>




LOCATIONS

WORLD HEADQUARTERS AND NORTH AMERICAN
MANUFACTURING
     Bontex, Inc.
     One Bontex Drive
     Buena Vista, Virginia 24416-1500 U.S.A.
     800-733-4234 / 540-261-2181
     E-mail:  bontex@bontex.com
     Website:  http://www.bontex.com

EUROPEAN HEADQUARTERS AND MANUFACTURING
     Bontex S. A.
     Rue Slar
     4801 Stembert, Belgium
     E-mail:  bontexsa@mail.att.net
     Website: http://www.bontex.be

INTERNATIONAL LIAISON OFFICES
     Bontex Australia
     20 Munro Street
     Macleod VIC 3085
     Australia

     Bontex Korea
     Rm. 601, Songnam Bldg.
     76-1, 4Ga, Chung Angdong
     Chung-Gu, Busan, 600-014, Korea

     Bontex Taiwan
     8FL.,  No. 52, Sec. 2
     Chung Shan N. Rd.
     Taipei, 10419, Taiwan

SALES AND DISTRIBUTION CENTERS
     Bontex Italia S.r.l.
     Via Francia
     37069 Villafranca (Verona)
     Italy

     Bontex De Mexico, S. A. De C. V.
     Boulevard Mariano Excobedo #801 Interior 2
     Colonia Andrade, C. P. 37370
     Leon, Guanajuato
     Mexico

     Bontex Hong Kong
     301 International Trade Centre
     11 Sha Tsui Road, Tsuen Wan
     Hong Kong

     Bontex Vietnam
     Floor 2, Room 204, 99 Pasteur St.
     Dist.1, HCMC Vietnam


                                       30

<PAGE>




STOCKHOLDERS' INFORMATION

ANNUAL MEETING
     10:30 a.m. November 7, 2001
     Best Western Inn at Hunt Ridge
     Willow Springs Drive
     Lexington, Virginia 24450

INDEPENDENT AUDITORS
     KPMG LLP
     10 S. Jefferson Street, Suite 1710
     Roanoke, Virginia 24011-1331


REGISTRAR AND TRANSFER AGENT
     Registrar and Transfer Company
     10 Commerce Drive
     Post Office Box 1010
     Cranford, New Jersey 07106

FORM 10-K
     A copy of the Company's 10-K filed with the Securities and Exchange
     Commission is available without charge to any stockholder. Requests should
     be sent to the attention of:

     Corporate Controller
     Bontex, Inc.
     One Bontex Drive
     Buena Vista, Virginia 24416-1500


                                       31

<PAGE>




BONTEX logo

The Bontex(R) logo is a registered trademark of Bontex, Inc.

Bontex, Inc. is an equal opportunity employer.

Accepted by the American Podiatric Medical
Association (Logo)

BS EN ISO 9001 Registered Company SATRA
(Logo)
National Accreditation of Certification Bodies
(Logo)
SATRA Footwear Technology Centre (Logo)

Recycled Paper (Logo)


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