LETTER TO SHAREHOLDERS

    The year of 1997 was disappointing for Homasote for a variety
of factors.  We had anticipated substantial enhancements to our
production process during the year.  However, due to (i) the
substantial modification of our production areas to make room for
a new state-of-the-art dryer that had been ordered, and (ii) the
restrictions of our productivity as a result of the dismantling of
two Making lines that produce Homasote products which occurred in
May of 1996, there were periods when we did not service our
customer accounts as we would have liked.
    After this process was completed, the engineering phase that
was necessary in anticipation of the placement of the new dryer was
ongoing and modification of the location for this placement was
finished.
    We engaged a contractor to assemble and install this new dryer
in concert with those Homasote employees that we could make
available to this effort.
    The new dryer was put into modified production the last week
of September 1997, which enabled us to go through a shakedown
period in order to surface any potential problems.  One of our main
concerns was to determine whether problems may exist on the start-up when heat
was introduced.  Another major purpose was to find the
speed necessary to dry Homasote and to evaluate the forward travel
of product through the dryer at a speed that would be economically
successful.
    We were not able to do this, for on November 1, 1997, a fire
occurred in the new dryer, making it completely inoperable and
resulting in an interruption of our anticipated productivity of our
major product line, which in turn affected our bottom line. 
Homasote employees did their best to replace many of the burned and
distorted parts that were required and were finally able to put the
dryer in a temporary state of repair toward the end of the year. 
On January 30, 1998, we again experience a fire in the new Coe
Dryer.  This fire was restricted to an area at the end of the dryer
and was repaired in a short period of time.  Once back into
production, the new dryer is expected to produce at 40% of its
anticipated production capability, but approximately equal to 100%
of our previous capacity running five units.
    Management believes that insurance will cover substantially
all of Homasote Company's property and business interruption losses
relating to the fires.  However, Homasote Company may incur costs
as a result of the fires, which will not be covered by insurance. 
Management is unable to estimate at this time the magnitude of such
costs.  The insurance claims process is lengthy and its outcome
cannot be predicted with certainty.  Based on its present
assessment of the situation, management believes that the fires
could have an adverse effect on Homasote Company's financial
position and operating results which can be expected to continue
well into 1998.  Management believes further that Homasote
Company's recovery under its business interruption policy, when
finally received, should provide the wherewithal to cover the
substantial portion of lost revenues.
    
    The relationship with our customers during this period has  
been good and it is our anticipation that it will remain so in the
future.  We are appreciative for their support during this
challenging period.
    Testing which is ongoing for our primary Homasote products,
polyiso sidewall foam sheathing and roofing insulation, is
necessarily continuous in order for us to maintain a competitive
position.  Substantial effort is made by our Research and
Development Department to conform to the environmental mandates. 
We are in touch with suppliers to develop a cost effective and
successful new sizing system.
    Homasote has been accepted from an aesthetic point of view to
be put on walls with no subsequent finish.  Wall requirements may
call for sophisticated laminates such as burlap, papers, textiles
and paint.  Products such as carpet underlayment with both
unmachined and grid machined surface are important to our scheme of
things, as is Homex which is a highway expansion strip and is also
used as a unique forming material for concrete sidewalks,
driveways, swimming pools, etc.
    Products processed in the Industrial Department are
continually gaining acceptance.
    On May 22, 1997, an election was conducted by the National
Labor Relations Board ("NLRB"), electing Teamsters Local Union No.
701 to be the exclusive bargaining representative for wages, hours
and conditions of employment for the hourly employees of the
Company.  Negotiations have commenced with the bargaining unit to
reach a labor contract covering the employees in the bargaining
unit.  Management does not believe that the unionization of the
hourly employees will materially affect the Company's financial
position or results of operations.
    The net loss for the year was $(445,778) after an income tax
benefit of $272,820, equal to $(1.22) net loss per share. 
Dividends were paid at a rate of $0.24 per share.
    Sales for 1997 were $24,979,819, a decrease from $26,969,869
in 1996.
    Homasote Company purchased an additional 29,950 shares of
Homasote common stock for our Treasury.  Net working capital was
$3,383,330, a decrease of $2,548,651 from last year.
    At this time of the year, we wish to take the opportunity to
thank our Board of Directors, shareholders, employees, customers,
and suppliers for their continuing support.





         ________________________           ____________________
         Irving Flicker                     Shanley E. Flicker
         Chairman of the Board              Vice Chairman
         and Chief Executive Officer        of the Board




<TABLE>
Homasote Company and Subsidiary
<CAPTION>
Consolidated Five Year Highlights
                                                1997
                                            ----------<S>                       
                        <C>
Net Sales                                      $  24,979,819
Depreciation and amortization                  $     888,944
(Loss) earnings before cumulative
 effect of changes in accounting
 principles                               $    (445,778)
Cumulative effect of changes in
 accounting principles                    $         ---
Net (loss) earnings                       $    (445,778)
Weighted average number of common
 shares outstanding                                  364,479
(Loss) earnings per share, before
 cumulative effect of changes in
 accounting principles -- basic           $       (1.22)
Per share, cumulative effect of
 changes in accounting principles         $         ---
Net (loss) earnings per share -- basic    $       (1.22)
Dividends-cash                                 $      90,300
Dividends per share                            $        0.24
Working capital                           $   3,383,330
Working capital ratio                             2.0-1
Capital expenditures                      $   4,291,324
Total assets                              $  20,137,096
Long-term debt, excluding current
 portion                                  $   3,562,500
Stockholders' equity                      $   7,974,309
Common shares outstanding                       348,801
Per share book value of common stock      $       22.86
</TABLE>



















<TABLE>
Homasote Company and Subsidiary
<CAPTION>
Consolidated Five Year Highlights
                                                1996
                                            ----------<S>                       
                        <C>
Net Sales                                      $  26,969,869
Depreciation and amortization                  $     606,830
(Loss) earnings before cumulative
 effect of changes in accounting
 principles                               $     708,489
Cumulative effect of changes in
 accounting principles                    $         ---
Net (loss) earnings                       $     708,489
Weighted average number of common
 shares outstanding                                  376,528

(Loss) earnings per share, before
 cumulative effect of changes in
 accounting principles -- basic           $        1.88
Per share, cumulative effect of
 changes in accounting principles         $         ---
Net (loss) earnings per share -- basic    $        1.88
Dividends-cash                                 $     165,694
Dividends per share                            $        0.44
Working capital                           $   5,931,981
Working capital ratio                             3.9:1
Capital expenditures                      $   2,444,627
Total assets                              $  20,067,202
Long-term debt, excluding current
 portion                                  $   3,987,500
Stockholders' equity                      $   8,943,929
Common shares outstanding                       376,251
Per share book value common stock         $       23.77
</TABLE>


















<TABLE>
                                                1995
                                            ----------<S>                       
                        <C>
Net Sales                                      $  25,536,461
Depreciation and amortization                  $     532,895
(Loss) earnings before cumulative
 effect of changes in accounting
 principles                               $     786,100
Cumulative effect of changes in
 accounting principles                    $         ---
Net (loss) earnings                       $     786,100
Weighted average number of common
 shares outstanding                                  383,756
(Loss) earnings per share, before
 cumulative effect of changes in
 accounting principles -- basic           $        2.05
Per share, cumulative effect of
 changes in accounting principles         $         ---
Net (loss) earnings per share     -- basic     $        2.05
Dividends-cash                                 $     221,087
Dividends per share                            $        0.58
Working capital                           $   6,503,700
Working capital ratio                             4.4:1
Capital expenditures                      $     886,221
Total assets                              $  15,302,966
Long-term debt, excluding current
portion                                   $         ---
Stockholders' equity                      $   8,424,834
Common shares outstanding                       377,451
Per share book value common stock         $       22.32
</TABLE>






















<TABLE>
Homasote Company and Subsidiary
<CAPTION>
Consolidated Five Year Highlights
                                                1994
                                            ----------          
<S>                                         <C>
Net Sales                                      $  25,698,178
Depreciation and amortization                  $     479,977
(Loss) earnings before cumulative
 effect of changes in accounting
 principles                               $   1,227,226
Cumulative effect of changes in
 accounting principles                    $         ---
Net (loss) earnings                       $   1,227,226
Weighted average number of common
 shares outstanding                            $     400,403
(Loss) earnings per share, before
 cumulative effect of changes in
 accounting principles -- basic           $        3.06
Per share, cumulative effect of
 changes in accounting principles         $         ---
Net (loss) earnings per share     --basic      $        3.06
Dividends-cash                                 $     199,457
Dividends per share                            $        0.50
Working capital                           $   7,102,868
Working capital ratio                             4.7:1
Capital expenditures                      $     189,993
Total assets                              $  15,501,034
Long-term debt, excluding current
portion                                   $     775,000
Stockholders' equity                      $   8,099,981
Common shares outstanding                       390,956
Per share book value common stock         $       20.72
</TABLE>



















<TABLE>
                                                1993
                                            ----------
<S>                                        <C>
Net Sales                                      $  23,850,504
Depreciation and amortization                  $     474,863
(Loss) earnings before cumulative effect
 of changes in accounting principles      $     475,702
Cumulative effect of changes in
 accounting principles                    $   2,299,730
Net (loss) earnings                            $  (1,824,028)
Weighted average number of common
 shares outstanding                                  426,248
(Loss) earnings per share, before
 cumulative effect of changes in 
 accounting principles -- basic           $        1.12
Per share, cumulative effect of changes
 in accounting principles                 $       (5.40)
Net (loss) earnings per share -- basic     $           (4.28)
Dividends-cash                                 $     211,610
Dividends per share                            $        0.50
Working capital                           $   6,254,861
Working capital ratio                             6.6:1
Capital expenditures                      $     250,049
Total assets                              $  14,253,593
Long-term debt, excluding current
portion                                   $     932,158
Stockholders' equity                      $   7,389,904
Common shares outstanding                       411,874
Per share book value common stock         $       17.94
</TABLE>























<TABLE>
TWO YEAR DIVIDEND AND STOCK PRICE COMPARISON
<CAPTION>
CASH DIVIDENDS

Quarterly cash dividends for the last two years were as follows:

Quarter       1997      1996
              ----      ----
<S>          <C>       <C>
First      $  0.12   $  0.12
Second        0.12      0.12
Third         0.00      0.10
Fourth        0.00      0.10
              ----      ----
           $  0.24   $  0.44
</TABLE>
<TABLE>
<CAPTION>
STOCK PRICES

Stock prices for the last two years were as follows:

                   1997                1996
Quarter       High      Low       High      Low
              -----     -----     -----     -----
<S>          <C>       <C>       <C>       <C>
First       $ 16.50   $ 13.00   $ 20.25   $ 17.00
Second      $ 18.25   $ 15.00   $ 17.88   $ 15.75
Third       $ 18.25   $ 14.00   $ 17.50   $ 14.50
Fourth      $ 18.25   $ 16.75   $ 15.50   $ 13.00

Number of Stockholders at December 31, 1997 and 1996 is 270 and
280, respectively.
</TABLE>


PROFILE

Homasote Company manufactures building and industrial products used
in various construction and manufacturing industries.

Homasote International Sales Co., Inc. is an export company.











<TABLE>
<CAPTION>
                  Homasote Company and Subsidiary
    CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

                                       Years ended December 31


                                1997         1996         1995
                                   ---------   ----------   ---------
<S>                          <C>          <C>          <C>

Net sales                   $ 24,979,819 $ 26,969,869 $25,536,461
Cost of sales                 19,419,846   20,013,748  18,870,545
                              ----------   ----------  ----------
Gross profit                   5,559,973    6,956,121   6,665,916
Selling, general and
 administrative expenses       6,350,194    5,850,714   5,465,568
                              ---------   ----------  ----------
Operating (loss) income        (790,221)    1,105,407   1,200,348
Other income (expense):
Gain on sale of assets            10,942       13 219      4,300
Interest income                  159,678       94,730    115,969
Interest expense               (185,678)     (89,600)   (85,472)
Other income                     86,681       69,975      76,765
                             ----------   ----------  ---------- 
                                  71,623       88,324    111,562
                             ----------   ----------  ---------- 
(Loss) earnings before
 income taxes                      (718,598)    1,193,731  1,311,910
Income tax benefit
 expense (note 5)             (272,820)      485,242     525,810
                             ----------   ----------  ----------
Net (loss) earnings                (445,778)      708,489     786,100

Retained earnings at beginning
 of year                          14,950,349   14,407,554  13,842,541
 less cash dividends paid
 ($.24 per share in 1997,
  $.44 per share in 1996 and
  $.58 per share in 1995)       (90,300)    (165,694)  (221,087)
                             ----------   ----------  ----------
Retained earnings at
 end of year                $ 14,414,271 $ 14,950,349 $14,407,554
                             ==========   ==========  ==========
Net (loss) earnings per
 common share -- basic     $     (1.22) $       1.88 $      2.05
                             ==========   ==========  ==========
Common shares outstanding
 (weighted average)              364,479      376,528     383,756
                             ==========   ==========  ==========

See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
                       Homasote Company and Subsidiary
                        CONSOLIDATED BALANCE SHEETS

ASSETS
                             December 31,        December 31,
                                 1997               1996
                            ------------         -----------
<S>                         <C>                  <C>

CURRENT ASSETS

Cash and cash equivalents    $    892,150       $   2,680,061
Accounts receivable (net
 of allowance for doubtful
 accounts of $58,854 and
 $59,776 in 1997 and 1996,
 respectively)                 2,212,448           1,873,340
Inventories (note 2)           2,650,989           3,085,886
Refundable income taxes           432,704                 ---
Deferred income
 taxes (note 5)                  119,175             102,760
Prepaid expenses and
 other current assets             471,087             241,253
                            ------------         -----------
Total current assets         $  6,778,553       $   7,983,300
                            ------------         -----------PROPERTY, PLANT AND
 EQUIPMENT, NET
 (notes 3 and 4)               10,994,712           7,539,476

OTHER ASSETS:
Deferred income 
 taxes (note 5)                   19,546              57,864
Restricted cash (note 4)          537,248           2,957,373
Other (note 6)                 1,807,037           1,529,189
                            ------------         -----------
                             $ 20,137,096       $  20,067,202
                            ============         ===========
</TABLE>













<TABLE>
<CAPTION>

LIABILITIES AND STOCKHOLDERS' EQUITY

                             December 31,        December 31,
                                 1997               1996
                            ------------         -----------
<S>                         <C>                  <C>

CURRENT LIABILITIES

Short term debt (note 4)         $  1,000,000       $         ---
Current installments of
 long-term debt (note 4)     $    392,500       $     152,500
Accounts payable                1,426,190             986,662
Accrued income taxes                  ---             329,228
Accrued expenses (note 7)         576,533             582,929
                            ------------         -----------
Total current liabilities    $  3,395,223       $   2,051,319

LONG-TERM DEBT, excluding
 current installments (note 4)  3,562,500           3,987,500
OTHER LIABILITIES (note 6)      5,205,064           5,084,454
                            ------------         -----------
Total liabilities              12,162,787          11,123,273
                            ------------         -----------
STOCKHOLDERS' EQUITY

Common stock, par value $0.20
 per share; Authorized
 1,500,000 shares;
 Issued 863,995 shares            172,799             172,799
Additional paid-in capital        898,036             898,036
Retained earnings              14,414,271          14,950,349
                            ------------         -----------
                               15,485,106          16,021,184
Less cost of common shares in
 treasury - 515,194 shares in
 1997 and 487,744 shares in
 1996 (note 8)                 7,510,797           7,077,255
                            ------------         -----------
Total stockholders' equity      7,974,309           8,943,929
                            ------------         -----------
                             $ 20,137,096       $  20,067,202
                            ============         ===========

COMMITMENTS AND CONTINGENCIES (note 10)

See accompanying notes to consolidated financial statements.
</TABLE>



<TABLE>
<CAPTION>
                            Homasote Company and Subsidiary
                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  YEARS ENDED DECEMBER 31
                                                      
                                1997        1996       1995
                            -----------  ---------- -----------
<S>                         <C>          <C>         <C>

Cash flows from operating
 activities:
Net (loss) earnings          $ (445,778)  $   708,489  $  786,100
Adjustments to reconcile
 net (loss) earnings to net
 cash (used in) provided by
 operating activities:
Depreciation and amortization    888,944       606,830    532,895
Gain on disposal of fixed
 assets                        (10,942)      (13,219)    (4,300)
Deferred income taxes            21,903        42,439     23,460

Changes in assets and
 liabilities:
(Increase) decrease in
 accounts receivable, net       (339,108)    (223,983)      8,909
Decrease (increase) in
 inventories                     434,897       671,546  (120,265)
Decrease (increase) in
 prepaid income taxes                ---       294,291      (294,291)
Increase in other assets        (341,565)    (223,697)   (64,241)
Increase in refundable income
 taxes                         (432,704)          ---        ---
Increase (decrease) in prepaid
 expenses and other current
  assets                      (229,834)        54,664   (58,781)
Increase in accounts payable     439,528       259,356     82,311
Decrease (increase) in accrued
 expenses                            (6,396)       163,288  (135,705)
Decrease (increase) in accrued
 income taxes                 (329,228)       329,288  (588,751)
Increase in other liabilities    120,610       128,269    272,815
                             ----------    ----------   --------
Net cash (used in) provided
 by operating activities       (229,673)    2,797,501    440,156
                             ----------    ----------  ---------








Cash flows from investing
 activities:

Proceeds from sale of
 equipment                        21,803       13,219       4,300
Capital expenditures         (4,291,324)  (2,444,627)   (886,221)
Decrease (increase) in
 restricted cash               2,420,125  (2,957,373)        ---
                             ----------   ----------   ---------
Net cash used in investing
 activities                   (1,849,396) (5,388,781)   (881,921)
                             ----------   ----------  ----------
Cash flows from financing
 activities:

Proceeds from issuance of
 short-term debt               1,000,000     1,000,000            ---
Repayment of short-term debt         ---   (1,775,000)    (3,591)
Repayment of long-term debt    (185,000)           ---  (150,000)
Cash dividends paid             (90,300)     (165,694)  (221,087)
Proceeds from sale of
 treasury stock                   32,500           ---      3,925
Purchase of treasury
 stock                          (466,042)      (23,700)  (244,085)
Proceeds from bond issue             ---     4,140,000        ---
Debt acquisition costs               ---      (233,292)       ---
                              ----------   ----------   --------Net cash
provided by (used in)
 financing activities:           291,158     2,942,314   (614,838)
                             ----------   ----------   ---------Net decrease
(increase) in
 cash and cash equivalents    (1,787,911)      351,034 (1,056,603)
Cash and cash equivalents
 at beginning of year          2,680,061     2,329,027  3,385,630
                             ----------    ----------  ----------
Cash and cash equivalents
 at end of year              $   892,150   $ 2,680,061 $2,329,027
                             ==========    ==========  ==========

Supplemental disclosures of
 cash flow information:
 Cash paid during the years for:

  Interest                   $   185,678  $    90,323  $   78,855
                             ----------   ----------   ---------
  Income taxes               $   479,640  $    53,294  $1,385,330
                             ----------   ----------   ---------

See accompanying notes to consolidated financial statements.
</TABLE>




Homasote Company and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995

NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    DESCRIPTION OF BUSINESS:  Homasote Company is in the business
of manufacturing insulated wood fibre board and polyisocyanurate
foam products, and operates in only one industry segment: the
manufacture and sale of rigid polyisocyanurate and structural
insulating building materials and packaging products for industrial
customers.  Sales in 1997 were distributed as follows:  building
material wholesalers and contractors, approximately 77%; and
industrial manufacturers, approximately 23%; and in 1996: building
material wholesalers and contractors, approximately 75%, and
industrial manufacturers, approximately 25%.
    The Company's primary basic raw material, wastepaper, is
generally readily available from two suppliers with which the
Company has purchase contracts that expire in 2009. (See note 10)

    PRINCIPLES OF CONSOLIDATION:  The consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiary, Homasote International Sales Co., Inc.  All significant
intercompany balances and transactions have been eliminated in
consolidation.

    CASH AND CASH EQUIVALENTS:  The Company considers all highly
liquid debt instruments purchased with a maturity of three months
or less to be cash equivalents.

    INVENTORY VALUATION COST:  Inventories are valued at the lower
of weighted average actual cost, which approximates first-in,
first-out (FIFO), or market.

    DEPRECIATION:  Property, plant and equipment is stated at
cost.  Depreciation of plant and equipment is computed using the
straight-line and various accelerated methods at rates adequate to
depreciate the cost of applicable assets over their expected useful
lives.  Maintenance and repairs are charged to operations as
incurred and major improvements are capitalized.  The cost of
assets retired or otherwise disposed of and the accumulated
depreciation thereon is removed from the accounts with any gain or
loss realized upon sale or disposal charged or credited to
operations.
    
    DEBT ACQUISITION COSTS:  Debt acquisition costs consist
principally of costs associated to secure long-term debt (see note
4).  These costs are being amortized using the straight-line method
over the term of the related debt.

    REVENUE RECOGNITION:  Revenue from product sales is recognized
when the related goods are shipped and all significant obligations
of the Company have been satisfied.

    EARNINGS PER SHARE:  Effective December 31, 1997, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share."  SFAS No. 128 requires a dual
presentation of earning per share--basic and diluted.  Basic
earnings per share has been computed by dividing net (loss)
earnings by the weighted average number of common shares
outstanding during the period.  Diluted earnings per share is not
presented since the Company has a simple capital structure with
only common stock outstanding in 1997, 1996, and 1995.

    BUSINESS AND CREDIT CONCENTRATIONS:  Sales of the Company's
products are dependent upon the economic condition of the housing
and manufacturing industries.  Changes in these industries may
significantly affect management's estimates and the Company's
performance.  The majority of the Company's customers are located
in the northeastern United States, with the remainder spread
throughout the United States and Canada.  No single customer
accounted for more than five percent of the Company's sales.
    The Company estimates an allowance for doubtful accounts based
upon the actual payment history of each individual customer. 
Consequently, an adverse change in the financial condition or the
local economy of a particular customer could affect the Company's
estimate of its bad debts.

    EMPLOYEE BENEFIT PLANS:  The Company has a non-contributory
pension plan covering substantially all employees who meet age and
service requirements.  Additionally, the Company provides certain
health care and life insurance benefits to retired employees.  The
net periodic pension costs are recognized as employees render the
services necessary to earn pension and post-retirement benefits.

    INCOME TAXES:  Income taxes are accounted for under the asset
and liability method.  Deferred tax assets and liabilities are
recognized for the estimated 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 carry-forwards.  Deferred tax assets
and liabilities are measured using enacted tax rates in effect for
the year in which those temporary differences are expected to be
recovered or settled.  

    IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF:  Effective January 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets to Be Disposed Of" ("SFAS
121").  This statement requires that long-lived assets and certain
identifiable intangibles held and used by the Company be reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.  SFAS
121 also requires that assets to be disposed of be reported at the
lower of the carrying amount or the fair value less costs to sell. 
Adoption of this statement did not have a material impact on the
Company's financial position, results of operations, or liquidity.


    USE OF ESTIMATES:  The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and 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 those
estimates.


NOTE 2-INVENTORIES
<TABLE>
<CAPTION>
    The following are the major classes of inventories as of
December 31, 1997 and 1996:
                               1997           1996
                             ---------      ---------
<S>                         <C>            <C>
         Finished goods    $ 1,726,209    $ 1,940,344
         Work in process         8,001         66,770
         Raw materials         916,779      1,078,772
                             ---------      ---------
                           $ 2,650,989    $ 3,085,886
                             =========      =========
Inventories include the cost of materials, direct labor and
manufacturing overhead.
</TABLE>

<TABLE>
<CAPTION>
NOTE 3-PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following at December
31:
                         --------------------------------------
                                                      Estimated
                             1997        1996       Useful Lives
                         ----------    ----------   ------------
<S>                     <C>           <C>        <C>
Land                        $     93,543  $     93,543    
Buildings and additions   9,045,195     9,003,571    10-50 years
Machinery and equipment  25,754,968    19,703,379     5-20 years
Office equipment          1,162,530       981,175       10 years
Automotive equipment        521,960       445,894      3-5 years
Construction in progress     245,480     2,397,604               
                         ----------    ----------     
                       $ 36,823,676  $ 32,625,166    

Less accumulated
depreciation             25,828,964    25,085,690
                         ----------    ----------
                       $ 10,994,712  $  7,539,476          
                         ==========    ==========     

NOTE 4-DEBT

    In November 1996, the Company entered into a loan agreement
(the "Agreement") and promissory note with the New Jersey Economic
Development Authority (the "Authority").  Under the Agreement, the
Authority loaned the Company $4,140,000 out of the proceeds from
the issuance of the Authority's Economic Growth Bonds (Greater
Mercer County Composite Issue) 1996 Series E (the Bonds) to be used
in connection with specified capital expenditures described in the
Agreement. Interest is charged at the variable rate of interest due
on the Bonds (3.7% at December 31, 1997).
    In connection with the Agreement, the Authority also entered
into a trust indenture with a bank to serve as trustee and tender
agent for the loan proceeds.  Principal and interest are payable
monthly to the trustee in varying amounts through 2006.  The funds
are held by the bank amounted to $537,248 and $2,957,373 at
December 31, 1997 and 1996, respectively, and are classified as a
restricted non-current asset in the accompanying consolidated
balance sheets.  The Company believes these funds will be
sufficient to cover its remaining capital expenditure commitments
in 1998.
    The trust indenture is secured in part by the Agreement and by
a direct pay Letter of Credit facility issued by another bank in
the face amount of $4,209,000.  The Letter of Credit facility
contains financial and other restrictive covenants including
minimum tangible net worth and other financial ratios.  At December
31, 1997, the Company was not in compliance with a financial
covenant and, on March 19, 1998, the Company received a waiver of
such noncompliance from the bank.  Additionally, on March 19, 1998,
the bank amended certain covenants prospectively such that
management believes the Company will be in compliance with the
covenants throughout 1998.
    In order to reduce its risks from interest rate fluctuations
under the Agreement, the Company entered into a five-year interest
rate cap agreement with a bank at a cost of $101,000 which is being
amortized to interest expense over the life of the agreement.  The
agreement entitles the Company to receive, on a monthly basis, the
amounts, if any, by which the interest payments on the Bond exceed
4.5% per annum.
    The balance of long-term debt outstanding at December 31, 1997
and 1996 was $3,955,000 and $4,140,000 respectively.  The aggregate
maturities of long-term debt for each of the five years subsequent
to December 31, 1997, are as follows:  1998, $392,500; 1999,
$406,667; 2000, $417,500; 2001, $432,500; 2002, $447,500;
thereafter $1,858,333.

    The Company has a $2.0 million unsecured demand note line of
credit agreement with a bank which has no specific expiration date
but is cancelable by the bank at any time.  Interest is charged at
the bank's index rate (8.5% at December 31, 1997) less 0.25%.  As
of December 31, 1997, $1.0 million was outstanding under the line
of credit.  On February 4, 1998, the Company increased the
borrowings outstanding under this facility to the full $2.0
million.
    Total interest costs incurred during 1997 was approximately
$289,000, of which approximately $103,000 was capitalized.


NOTE 5-INCOME TAXES

Income tax expense is computed based on the applicable statutory
rates and is comprised of the following:

</TABLE>
<TABLE>
<CAPTION>
                                 1997         1996        1995
                                -------     -------     -------
Current:

<S>                            <C>         <C>         <C>
    Federal                  $ (294,723) $  341,473  $  387,601 
    State                             0     101,330     114,749
                                -------     -------     -------
                               (294,723)    442,803     502,350
                                -------     -------     -------
Deferred:                                                       
    Federal                      62,384      36,072      19,941
    State                       (40,481)      6,367       3,519
                                -------     -------     -------
                                 21,903      42,439      23,460
                                -------     -------     -------
Total income tax (benefit)
expense                       $(272,820)  $ 485,242   $ 525,810
                                =======     =======     =======

The actual income tax expense differs from the amounts computed by
applying the U.S. Federal Income Tax rate of 34% to (loss) earnings
before income taxes as a result of the following:

                                 1997         1996        1995
                                -------     -------     -------
Computed "expected" tax
 (benefit) expense            $(244,323)  $ 405,869   $ 446,049
State income taxes (net of
 Federal income tax benefit)     (26,717)     71,080      78,057
Other                            (1,780)      8,293       1,704
                                -------     -------     -------
                              $(272,820)  $ 485,242   $ 525,810
                                =======     =======     =======

The tax effect of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1997 and 1996 are presented below:
</TABLE>





<TABLE>
<CAPTION>
                                              1997        1996
                                            -------     -------
<S>                                      <C>         <C>        
Deferred tax assets:
    Accounts receivable, due to allowance
     for doubtful accounts               $   23,542  $   23,910
    Inventories, principally due to
     reserves for obsolescence              161,672     177,672
    Other liabilities, principally due to
     supplemental pension and post-
     retirement costs                     2,082,025   2,033,782
    Nondeductible accrued expense            29,784      25,103
    Net operating loss carryforwards--
     state                                   51,490         ---
                                          ---------   ---------
      Total gross deferred tax assets     2,348,513   2,260,467
    Less valuation allowance             (1,032,940) (1,032,940) 
                                          ---------   --------- 
      Net deferred tax assets             1,315,573   1,227,527 
                                          ---------   --------- 

Deferred tax liabilities:
    Fixed assets, due to accelerated
     depreciation                           500,522     522,522
    Other assets, due to pension costs      657,623     520,997
    Accumulated DISC income                  18,707      23,384
                                          ---------   ---------
      Total gross deferred tax
      liabilities                         1,176,852   1,066,903
                                          ---------   --------- 
      Net deferred tax asset             $  138,721  $  160,624 
                                          =========   =========

There was no change in the total valuation allowance for the years
ended December 31, 1997 and 1996.  In addition, at December 31,
1997, the Company has net operating loss carryforwards for state
income tax purposes of approximately $850,000, which are available
to reduce future state income taxes, if any, through the year 2004.














</TABLE>
NOTE 6-EMPLOYEE BENEFIT PLANS

    The Company has a noncontributory defined benefit retirement
plan (the Pension Plan) covering all eligible employees.  Benefits
under the Pension Plan are calculated at a rate of $15.00 per month
per year of service, as defined (increased to $20.00 in January
1998). Additionally a supplemental noncontributory plan (the
Supplemental Plan) covering certain key employees of the Company
provides benefits based upon the employee's compensation, as
defined, during the highest five of the last ten consecutive years
preceding retirement.
    Actuarial assumptions for both the Pension and Supplemental
Plans include 7.25% (7.25% in 1996 and 1995) for the assumed
discount rate used to determine the present value of future
benefits, (7.00% for expense) and 8.5% for expected long-term rate
of return on plan assets.  The assumed rate of average future
increases in pension benefit compensation was 5.5% for disclosure
and 5% for expense (5% in 1996 and 1995).
    Employer costs (benefit) for the Pension and Supplemental
Plans amounted to $(13,651), $145,707, and $289,870 in 1997, 1996
and 1995, respectively.  Net periodic pension cost in 1997, 1996
and 1995 was composed of the following:

<TABLE>
<CAPTION>

                                                1997
                                       Pension      Supplemental
     Net periodic pension cost           Plan           Plan
     -------------------------      -----------     ------------
<S>                                 <C>                 <C>
Service cost-benefits earned
 during the period                  $   95,678        $   39,510
Interest cost on projected
 benefit obligation                         340,347           193,743
Actual return on plan assets        (1,545,757)              ---
Net amortization and deferral               768,167            94,661
                                     ---------         ---------
                                    $ (341,565)       $  327,914
                                     =========         =========













                                                1996
                                       Pension      Supplemental
     Net periodic pension cost           Plan           Plan
     -------------------------      -----------     ------------
<S>                                 <C>                 <C>
Service cost-benefits earned
 during the period                  $   93,276        $   38,549
Interest cost on projected
 benefit obligation                         332,931           204,758
Actual return on plan assets        (1,313,346)              ---
Net amortization and deferral               663,442           126,097
                                     ---------         ---------
                                    $ (223,697)       $  369,404
                                     =========         =========

                                                1995
                                       Pension      Supplemental
     Net periodic pension cost           Plan           Plan
     -------------------------      -----------     ------------
<S>                                 <C>                 <C>     
Service cost-benefits earned
 during the period                  $   79,782        $   35,561
Interest cost on projected
 benefit obligation                         333,473           207,047
Actual return on plan assets        (1,828,743)              ---
Net amortization and deferral             1,347,071           115,679
                                     ---------         ---------
                                    $  (68,417)       $  358,287
                                     =========         =========

</TABLE>

<TABLE>
<CAPTION>
    The Company's funding policy for the Pension Plan is to
contribute amounts sufficient to meet minimum funding requirements
set forth in U.S. employee benefit and tax laws.  The Company's
policy for funding the Supplemental Plan is to contribute benefits
in amounts as determined at the discretion of management.  As of
December 31, 1997 and 1996, the Supplemental Plan was unfunded.  A
schedule reconciling the projected benefit obligation of the
Company's two pension plans with recorded pension asset (liability)
is as follows:











                                             1997     
Reconciliation of funded status      Pension      Supplemental   
    as of December 31                 Plan           Plan
-------------------------------    -----------    -------------
<S>                                 <C>               <C>
Actuarial present value of benefit
 obligation
    Vested benefit obligation      $(5,036,931)     $(2,169,973)
    Accumulated benefit obligation  (5,079,592)      (2,451,209)
                                     =========        =========
Projected benefit obligation for
 service rendered to date           (5,079,592)      (2,928,666)
Plan assets at fair market value     9,305,347              ---
                                     ---------         ---------
Assets in excess of (less than) pro-
 jected benefit obligation           4,225,755       (2,928,666)
Unamortized net transition (asset)
 obligation                           (116,255)         547,113
Unrecognized prior service cost        160,172              ---
Unrecognized net gain from past
 experience different from that
 assumed                            (2,625,615)        (598,808)
                                     ---------         ---------
(Accrued)/prepaid pension cost     $ 1,644,057      $(2,980,361)
                                     =========         =========


                                             1996     
                                     Pension       Supplemental  
  Reconciliation of funded status        Plan         Plan
   -------------------------------        -----------   ------------
<S>                                 <C>               <C>
Actuarial present value of benefit
 obligation
    Vested benefit obligation      $(4,796,768)    $(2,193,562)
    Accumulated benefit obligation  (4,845,123)     (2,458,153)
                                     =========      ===========
Projected benefit obligation for
 service rendered to date           (4,845,123)     (3,026,893)
Plan assets at fair market value     8,123,079             ---
                                     ---------      -----------
Assets in excess of (less than)
 projected benefit obligation         3,277,956     (3,026,893)
Unamortized net transition (asset)
 obligation                           (143,933)        683,891
Unrecognized prior service cost        147,264             ---
Unrecognized net gain from past
 experience different from that
 assumed                            (1,978,795)       (401,008)
                                     ---------       ----------
(Accrued)/prepaid pension cost     $ 1,302,492     $(2,744,010)
                                     =========       ==========
</TABLE>

    The Company has a voluntary savings plan for which all
employees are eligible.  The Plan provides for the Company to
contribute a minimum of $0.25 for every dollar contributed by
employees, up to 4% of their salaries.  Company contributions
charged to operations under this plan amounted to approximately
$29,000 in each of the years 1997, 1996 and 1995.
    The Company also provides certain health care and life
insurance benefits for retired employees.  Only Company employees
retired on or before May 1, 1992, are eligible for the health care
benefit.  Effective January 1998, the Company amended eligibility
to participate in the plan to include all retirees (past and
present) who have reached the age of 65.  The Company's policy is
to fund the cost of health care and life insurance benefits for
retirees in amounts determined at the discretion of management.  As
of December 31, 1997, and 1996 the plan was unfunded.

<TABLE>
<CAPTION>
The post-retirement benefit cost for 1997, 1996 and 1995 was
composed of the following:
                             1997        1996        1995
                           -------     -------     -------
<S>                       <C>         <C>         <C>
Service cost            $    3,329   $   3,681   $   3,006
Interest cost               67,350      65,432     150,542
Net amortization
 and deferral             (105,757)   (141,435)    (31,228)
                           -------     -------     -------
Net post-retirement cost      $ (35,078)  $ (72,322)  $ 122,320
 (credit)                       =======     =======     =======
</TABLE>


<TABLE>
<CAPTION>
The actuarial present value of benefit obligations and the amount
recognized in the consolidated balance sheets, included in other
liabilities, as of December 31, 1997 and 1996 are as follows:

                                       1997        1996
                                    ---------    ---------
<S>                                <C>          <C>
Retirees                          $   890,478  $   859,062
Fully eligible active plan
 participants                          48,990       43,581
Other active plan participants         31,994       33,796
                                    ---------    ---------
Accumulated post-retirement
 benefit obligation                        971,462      936,439
Unrecognized actuarial gain         1,253,241    1,404,005
                                    ---------    ---------
Accrued post-retirement benefit
 obligation                       $ 2,224,703  $ 2,340,444
                                    =========    =========
</TABLE>
    Effective June 1995, the Company changed its insurance carrier
providing health care benefits for retirees at a cost savings to
the Company.  This change did not impact upon the benefits offered
to the retirees.  The result of this change on the actuarial
present value of benefit obligations was to reduce the accumulated
post-retirement benefit obligation and increase the unrecognized
actuarial gain.  The unrecognized actuarial gain will be based on
the remaining life expectancy of the retirees.

    The assumed annual rate of future increases in the per capita
cost of health care benefits was 9% for both disclosure and expense
in 1997 (10% in 1996).  The rate was assumed to decline gradually
to 5.5% for expense and for disclosure in 2002, and remain level
thereafter.  Increasing the health care cost trend by 1% in each
year would increase the accumulated benefit obligation and the
interest cost of $51,000 and $3,400, respectively, for 1997, and
$49,000 and $3,300, respectively, for 1996.  The weighted average
discount rate used in determining the accumulated benefit
obligation was 7.25% for disclosure and 7% for expense in 1997
(7.25% and 7.25%, respectively, in 1996).



NOTE 7-ACCRUED EXPENSES
<TABLE>
<CAPTION>
    Accrued expenses as of December 31, 1997 and 1996 consist of
the following:
                                       1997        1996
                                     -------     -------
<S>                                 <C>         <C>
Commissions                        $ 257,784   $ 213,626
Payroll                              115,940     116,165
Other                                202,809     253,138
                                     -------     -------
                                   $ 576,533   $ 582,929
                                     =======     =======

</TABLE>
NOTE 8-TREASURY STOCK

    The Company has a policy of offering directors, officers, and
employees the option to purchase reacquired shares of Homasote
Company common stock on the date acquired and at the purchase price
paid by the Company.
<TABLE>







<CAPTION>
A summary of activity for the years 1997, 1996 and 1995 is as
follows:
            Acquired           Sold       Retained in Treasury  
        ----------------    -------------    ----------------
       Shares    Cost      Shares  Cost     Shares      Cost
       ------    ----      ------  ----     ------      ----
<S>    <C>       <C>         <C>    <C>     <C>       <C>
1997        29,950  $ 466,042   2,500  $ 32,500  27,450  $ 433,542
1996         1,200  $  23,700     ---  $    ---   1,200  $  23,700
1995        13,755  $ 244,085     250  $  3,925  13,505  $ 240,160
</TABLE>


NOTE 9-FAIR VALUE OF FINANCIAL INSTRUMENTS

    Financial Accounting Standards Board Statement No. 107,
"Disclosures about the Fair Value of Financial Instruments,"
defines the fair value of a financial instrument as the amount at
which the instrument could be exchanged in a current transaction
between willing parties.  The carrying amounts of the Company's
financial instruments at December 31, 1997 and 1996 approximate
fair value because of the short maturity of those instruments and
with respect to the Bonds (see note 4) due to the variable interest
rates which approximate current market rates.

NOTE 10-COMMITMENTS AND CONTINGENCIES

    The Company's primary basic raw material, wastepaper, is
generally readily available from two suppliers with which the
Company has purchase contracts that expire in 2009.  Under the
terms of the contracts, the Company is required to make purchases
at a minimum price per ton, as defined, or at the prevailing market
price, whichever is greater.  The contracts do not require minimum
quantity purchases by the Company.  Purchases in 1997 and 1996
aggregated approximately $923,000 and $929,000, respectively. 

    During the normal course of business, the Company is from time
to time involved in various claims and legal actions.  In the
opinion of management, the ultimate disposition of these matters
will not have a material adverse effect on the Company's
consolidated financial position or results of operations.

    On November 1, 1997, a fire broke out on the Company's new gas
fired board dryer.  The fire caused severe damage to the dryer, as
well as disruptions to production.  The Company has filed an
insurance claim.





    

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
HOMASOTE COMPANY

We have audited the accompanying consolidated balance sheets of
Homasote Company and subsidiary as of December 31, 1997 and 1996,
and the related consolidated statements of operations and retained
earnings and cash flows for each of the years in the three-year
period ended December 31, 1997.  These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Homasote Company and subsidiary as of December 31, 1997
and 1996, and the results of their operations and their cash flows
for each of the years in the three-year period ended December 31,
1997, in conformity with generally accepted accounting principles.

February 20, 1998 except as to the third paragraph
of note 4, which is as of March 19, 1998
Princeton, N.J.



















MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

RESULTS OF OPERATIONS 1997-1996

    The Company's sales are derived from building material
wholesalers and industrial manufacturers.  1997 sales decreased by
$1,990,000, or 7.4%, to $24,980,000, from $26,970,000 in 1996. 
While demand remained strong through the third quarter of 1997,
production and floor inventories could not keep pace with orders
for Homasote products.  This was due to the 40% reduction in
production capacity brought about by the removal of two production
units to make room for installation of new, more efficient
production equipment. 
    The Company installed a new dryer that was originally
scheduled for partial completion in June 1997, but was placed into
modified production during the last week of September 1997 for an
initial shakedown period in order to surface potential operating
problems.  However, on November 1, 1997, a fire occurred in the new
dryer, causing severe damage to the rolls, insulation and other
structural steel components, rendering it inoperable and resulting
in an interruption of the Company's anticipated productivity of its
major product line, which adversely affected revenues and
profitability.  The dryer was placed in a temporary state of repair
and production resumed on January 12, 1998.  On January 30, 1998,
there was another fire in the new dryer that was restricted to an
area at the end of the dryer.  The damage was repaired in a short
period of time with a resumption of production on February 9, 1998. 
Once back into production, the new dryer is expected to produce at
a level of 40% of its anticipated production capability, which
level is equivalent to the Company's previous capacity in running
five units.
    Management believes that insurance will cover substantially
all of the Company's property and business losses relating to the
fires.  However, the Company may incur costs as a result of the
fires which will not be covered by insurance.  Management is unable
to estimate at this time the magnitude of such costs.  The
insurance claims process is lengthy, and its outcome cannot be
predicted with certainty.
    Based on its present assessment of the situation, management
believes that the fires have had an adverse effect on the Company's
financial position and operating results which can be expected to
continue well into 1998.  The Company believes that recovery under
its business interruption policy, when finally received, should
provide the wherewithal to cover the substantial portion of lost
revenues.
    Cost of goods sold, as a percentage of sales, increased from
74.2% in 1996, to 77.7% in 1997.  This increase is attributable to
increased overhead due to production inefficiencies, repairs to the
new dryer, higher maintenance costs on the older equipment, and
overtime incurred in an effort to meet demand for the Company's
product.


    Selling, general and administrative expenses as a percentage
of sales were 25.4% in 1997 as compared to 21.7% in 1996.  SG&A
expenses increased in the areas of salaries, due to the hiring of
additional personnel for the sales force, advertising, and claims
for unsatisfactory material.
    Interest income increased by 68.6% to $159,678 in 1997 from
$94,730 in 1996, due primarily to the balance being carried for the
full year of 1997 in the restricted cash account for new dryer-
related purchases.
    Interest expense on debt increased by 107.2% to $185,678 in
1997, from $89,600, in 1996, due to debt incurred with relation to
the dryer project.  
    As a result of the loss in 1997, the Company recorded an
income tax benefit of $272,820 which primarily relates to a federal
income tax refund due the Company from carrying such loss back to
years in which the Company paid income taxes.


RESULTS OF OPERATION 1996-1995

    The Company's sales are derived from building material
wholesalers and industrial manufacturers.  1996 sales increased by
$1,443,000, or 5.6%, to $27.0 million, from $25.5 million in 1995. 
This was due primarily to a change in marketing strategy, which
included a September 1996 agreement with Weyerhaeuser Corporation
for the joint marketing and distribution in the Unites States, of
the Company's building products, contributing to an increase in
sales volume in the third and fourth quarters of 1996.  The
approximate sales mix of products in 1996 remains unchanged from
1995, with sales of Millboard wholesalers at 75% and Industrial
manufacturers at 25%.  Cost of goods sold, as a percentage of
sales, increased from 73.9% in 1995, to 74.2% in 1996, a change of
$1,143,000.  Net earnings as a percentage of sales decreased from
3.1% in 1995 to 2.6% in 1996, a change of $78,000.  While the
fourth quarter 1996 cost of goods sold percentage reflected
improvements in production volumes and manufacturing efficiencies,
it was not sufficient to offset the higher costs incurred during
the first nine months of the year resulting in the full year 1996
cost of sales percentage being higher than 1995.
    Selling, general and administrative expenses as a percentage
of sales were comparable from 1996 to 1995 at 21.6% and 21.4%
respectively.
    Interest income decreased by 18.3% to $94,730 in 1996, from
$115,969 in 1995, due to lower average balance of funds available
for investment.
    Interest expense on debt increased by 4.8% to $89,600 in 1996,
from $85,500 in 1995, due to increasing interest rates on an
increasing average balance of debt outstanding.  The effective
income tax expense rate increased to 40.6% in 1996 as compared to
40.1% in 1995 primarily as a result of a higher effective rate for
state income taxes.



LIQUIDITY AND CAPITAL RESOURCES

     Cash flows from operating activities and bank borrowings are
the primary sources of liquidity.  Net cash (used in) provided by
operating activities amounted to $(0.2) million in 1997, $2.8
million in 1996, and $0.4 million in 1995.
    Capital expenditures for new and improved facilities and
equipment, which are financed primarily through internally
generated funds and debt, were $4.3 million in 1997, $2.4 million
in 1996, and $0.9 million in 1995.  The Company has estimated
capital expenditures for 1998 in the amount of $3,230,500.  Such
amounts may be revised based on the timing of receipts of payments
or settlements from its insurance carrier on the fire loss
described under "Results of Operations 1997-1996".
    Cash flows from financing activities declined from $2.9
million in 1996 to $0.3 million in 1997, primarily as a result of
proceeds of $4.1 million in 1996 from a bond issue (none in 1997)
and a reduction of $1.8 million of repayments of short-term debt.
    In November 1995, the Company entered into a contract with a
manufacturer for the purchase of a new gas fired board dryer.  The
entire expansion project included the dryer, renovations to plant
and ancillary equipment, rerouting conveyors and rebuilding and
replacing molds.  As discussed under "Results of Operation 1997-1996",
management believes that insurance will cover substantially
all of the Company's property and business losses relating to the
fires.  However, the Company may incur costs as a result of the
fires which will not be covered by insurance.  Management is unable
to estimate at this time the magnitude of such costs.  The
insurance claims process is lengthy, and its outcome cannot be
predicted with certainty.
    Based on its present assessment of the situation, management
believes that the fires have had an adverse effect on the Company's
financial position and operating results which can be expected to
continue well into 1998.  The Company believes that recovery under
its business interruption policy, when finally received, should
provide the wherewithal to cover a substantial portion of lost
revenues.
    At December 31, 1997, the Company had a $2.0 million unsecured
demand note line of credit with a bank of which $1.0 million was
outstanding.  On February 4, 1998, the Company increased the
borrowings outstanding to the full $2.0 million.  Management
believes that cash flows from operations coupled with its bank
credit facilities are adequate for the Company to meet its
obligations.
    The Company has a Letter of Credit facility which contains
financial and other covenants.  At December 31, 1997, the Company
was not in compliance with a financial covenant and , on March 19,
1998, the Company received a waiver of such noncompliance from the
bank and the bank amended certain covenants prospectively such that
management believes the Company will be in compliance with the
covenants throughout 1998.



YEAR 2000

    The Company is conducting a review of its computer systems to
identify the systems that could be affected by the Year 2000 issue. 
The Company is developing an implementation plan to resolve this
issue.  Management presently believes that with modifications to
existing software, and conversions to new software for certain
applications, the Year 2000 matter will not pose a significant
operational problem for the Company.  Management expects its
implementation plans to be completed on a timely basis.

INFLATION AND ECONOMY

    The Company will continue to maintain a policy of constantly
monitoring such factors as product demand and costs, and will
adjust prices as these factors and the economic condition warrant.


OTHER DEVELOPMENTS

    During 1994, demand for wastepaper, the primary raw material
for the Company's products, surpassed the supply for the first
time.  This situation was due primarily to demand by new industries
created to handle the volume of wastepaper generated by mandated
municipal recycling, and as a result, effective in  September 1994,
the Company entered into purchase agreement contracts to purchase
readily available wastepaper from two suppliers.  Under the terms
of the contracts, the Company is required to make purchases at a
minimum price per ton, as defined, or at the prevailing market
price, whichever is greater.  The contracts do not require minimum
quantity purchases by the Company.  Purchases in 1997 and 1996
aggregated approximately $923,000 and $929,000, respectively.  The
contracts expire in 2009.
    In September 1996, the Company signed an agreement with
Weyerhaeuser Corporation for the joint marketing and distribution
of the Company's products.
    On February 21, 1997, the Board of Directors of the Company
authorized the retention of a financial advisor to assist in the
investigation of alternatives to enhance the value of the Company's
common stock to the shareholders.  On May 23, 1997, the Board of
Directors terminated this effort due to developments with respect
to union negotiations.  
    On May 22, 1997, an election was conducted by the National
Labor Relations Board ("NLRB"), electing Teamsters Local Union No.
701 to be the exclusive bargaining representative for wages, hours
and conditions of employment for the hourly employees of the
Company.  Negotiations have commenced with the bargaining unit to
reach a labor contract covering the employees in the bargaining
unit.  Management does not believe that the unionization of the
hourly employees will materially affect the Company's financial
position or results of operations.



<TABLE>
<CAPTION>
SUMMARIZED (unaudited) QUARTERLY FINANCIAL DATA OF THE COMPANY FOR
THE YEARS 1997 AND 1996 ARE AS FOLLOWS:
         (in thousands of dollars except per share data)

                                     1997
                      -----------------------------------
<S>                  <C>      <C>        <C>       <C>           
                      First    Second     Third    Fourth
                      -----     -----     -----     -----
Net Sales                $ 6,731   $ 6,177   $ 6,003   $ 6,069       
                      =====     =====     =====     =====
Gross Profit         $ 1,854   $ 1,170   $ 1,043   $ 1,493      
                      =====     =====     =====     =====
Net Earnings (loss)  $   129   $  (301)  $  (221)  $   (53)          
                      =====     =====     =====     =====
Net earnings (loss)
per common share   $    0.34   $ (0.80)   $(0.62)   $(0.14)          
                      =====     =====     =====     =====


                                     1996
                      -----------------------------------
<S>                  <C>      <C>        <C>       <C>           
                      First    Second     Third    Fourth
                      -----     -----     -----     -----
Net Sales                $ 6,143   $ 6,431   $ 7,446   $ 6,950       
                      =====     =====     =====     =====
Gross Profit         $ 1,485   $ 1,346   $ 1,544   $ 2,581      
                      =====     =====     =====     =====
Net Earnings (loss)  $    17   $   (15)  $    55   $   651      
                      =====     =====     =====     =====
Net earnings (loss)
per common share     $  0.05   $ (0.04)   $ 0.15    $ 1.73
                      =====     =====     =====     =====

</TABLE>
The fourth quarter 1997 was adversely affected by a fire in the
Company's new dryer, which was offset by an adjustment to reduce
depreciation expenses recorded prior to the 4th quarter amounting
to approximately $270,000.  The fourth quarter, 1996 reflects an
improved gross profit margin compared to prior 1996 quarters, due
primarily to higher production volume, improved manufacturing
efficiencies, sales product mix and a reduction of pension costs
and property taxes.  Also, net earnings benefited in the fourth
quarter of 1996 as a result of the reversal of unused customer
volume rebates of approximately $100,000 before income taxes.