<PAGE>

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                  ---------------
                                    FORM 10-K

         (Mark One)

         /X/  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
              SECURITIES EXCHANGE ACT OF 1934

              For the fiscal year ended January 1, 1999

                                       OR

         / /  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF SECURITIES
              EXCHANGE ACT OF 1934

                For the Transition Period From ______to_________

                        Commission File Number 333-36675

                                  ---------------
                             BURKE INDUSTRIES, INC.
             (Exact name of Registrant as specified in its charter)

        CALIFORNIA                                 94-3081144
(State or other jurisdiction of                (I.R.S. Employer
 incorporation or organization)                Identification No.)

               2250 SOUTH TENTH STREET, SAN JOSE, CALIFORNIA 95112
               (Address of principal executive office) (Zip Code)

                                 (408) 297-3500
              (Registrant's telephone number, including area code)

                                  ---------------
          Securities registered pursuant to Section 12 (b) of the Act:

                                       NONE

                                  ---------------
           Securities registered pursuant to Section 12(g) of the Act:

                            10% Senior Notes Due 2007
                     Guarantees of 10% Senior Notes Due 2007
                          Floating-Rate Notes Due 2007
                   Guarantees of Floating-Rate Notes Due 2007
                              (Title of each class)

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

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

As of March 15, 1999, the aggregate market value of the registrant's Common
Stock held by non-affiliates of the registrant was approximately $2,297,979.
The aggregate market value has been calculated on a basis which excluded shares
of Common Stock which may be acquired through excercise of options or warrants.
As of March 15, 1999, the number of outstanding shares of the registrant's
Common Stock was 3,857,000.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None.
<PAGE>




                           TABLE OF OTHER REGISTRANTS

<TABLE>
<CAPTION>
                                                                                              Address Including Zip  
                                                                                                Code and Area Code  
                                                                                                       and           
                                                          Primary             IRS Employer     Telephone Number of   
                                Jurisdiction of     Standard Industrial      Identification    Principal Executive   
Name of Corporation              Incorporation     Classification Number         Number              Offices         
------------------------------  ---------------    ---------------------     --------------   ---------------------
<S>                                <C>                      <C>                <C>            <C>
Burke Flooring Products, Inc.      California               3069               94-2147284     2250 Tenth Street
                                                                                              San Jose, CA 95112
                                                                                              (408) 297-3500

Burke Rubber Company, Inc.         California               3069               94-2157283     2250 Tenth Street
                                                                                              San Jose, CA 95112
                                                                                              (408) 297-3500

Burke Custom Processing, Inc.      California               3069               94-2157282     2250 Tenth Street
                                                                                              San Jose, CA 95112
                                                                                              (408) 297-3500

</TABLE>


<PAGE>




                             BURKE INDUSTRIES, INC.
                       INDEX TO ANNUAL REPORT ON FORM 10-K
                    FOR THE FISCAL YEAR ENDED JANUARY 1, 1999

<TABLE>
<CAPTION>

CAPTION                                                                                                         PAGE
-------                                                                                                         ----
                                                    PART I
<S>               <C>                                                                                            <C>
ITEM 1.           BUSINESS........................................................................................1

ITEM 2.           PROPERTIES.....................................................................................11

ITEM 3.           LEGAL PROCEEDINGS..............................................................................12

ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................13

                                                   PART II

ITEM 5.           MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..........................13

ITEM 6.           SELECTED FINANCIAL DATA........................................................................14

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

ITEM 7A.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................23

ITEM 8.           CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................................23

ITEM 9.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........23

                                                   PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................24

ITEM 11.          EXECUTIVE COMPENSATION.........................................................................28

ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................30

ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................31

                                                   PART IV

ITEM 14.          EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K..................34

</TABLE>
<PAGE>



                                     PART I

ITEM 1. BUSINESS

                                    OVERVIEW

     Burke Industries, Inc. (the "Company" or "Burke"), headquartered in San 
Jose, California, is a leading, diversified manufacturer of highly 
engineered, rubber, silicone and vinyl-based (herein "elastomer") products. 
Through its vertically integrated operations and reputation for quality 
elastomer-based products, Burke has become (i) the largest domestic producer 
of precision silicone seals for commercial and military aircraft ("Aerospace 
and Defense Products"), (ii) a leading nationwide producer of both rubber and 
vinyl cove base and floor covering accessories for commercial and industrial 
applications ("Flooring Products") and (iii) a value-added producer of 
high-performance silicone hose, roofing and membrane products for the 
heavy-duty truck, commercial building and fluid containment industries 
("Commercial Products").

                                     HISTORY

     The Burke Rubber Company was founded in 1942 as a family-owned 
manufacturer of custom industrial rubber products. By the early 1950s, Burke 
manufactured a proprietary line of rubber floor tile and cove base as well as 
custom-molded rubber products. The Burke product line subsequently grew to 
include flexible membrane products for industrial uses, as well as engineered 
elastomer-based products for defense-related applications. In 1970, Burke 
developed an improved roofing and fluid barrier technology based upon 
DuPont's patented Hypalon elastomer polymer. The Company was renamed Burke 
Industries, Inc. in 1972 to reflect its broadened base of business.

     The Company began expanding beyond its traditional product lines with 
its acquisition of the silicone-based aerospace seal and automotive hose 
production assets of Purosil, Inc. ("Purosil") in March 1993. In 1995, 
recognizing that the seals segment of the aerospace industry was fragmented 
and ripe for consolidation, Burke sought to expand its position in the 
category through the acquisition of assets of two former industry leaders 
that were then experiencing financial difficulties: California-based SFS 
Industries and Massachusetts-based Haskon Corporation. Purosil, SFS and 
Haskon had each been an independent producer of precision silicone aerospace 
components, and together had over 100 years of service to the commercial and 
military aerospace industry.

     In April 1998, the Company acquired from Sovereign Specialty Chemicals, 
Inc. ("Sovereign") all of the outstanding capital stock of Mercer Products 
Company, Inc. ("Mercer"). For many years, Mercer has been a leading 
manufacturer of plastic and vinyl flooring products such as vinyl cove base, 
transitional and finish mouldings, corners, stair treads and other 
accessories. Management believes that the highly successful vinyl cove base 
and moulding product lines and the strong presence in the eastern United 
States developed by Mercer complement the Company's position as the dominant 
producer of rubber cove base and floor covering accessories in the western 
United States.

     Mercer was merged with and into the Company, effective August 12, 1998. 
Burke has integrated Mercer's product lines into its own and now operates its 
Flooring Products business throughout the nation under the name BurkeMercer 
Flooring Products.

     Mercer represents the fifth acquisition completed by Burke's current 
management team over the last six years. Burke's integration of these 
acquisitions has led to a dominant position in the aerospace 

                                       1
<PAGE>

seals market, opened new markets for its Flooring Products business, improved 
operating efficiencies, consolidated overhead and strengthened technical 
capabilities.

     In August 1997, the Company entered into a recapitalization (the 
"Recapitalization") pursuant to which the Company was recapitalized by means 
of a merger and J.F. Lehman Equity Investors I, L.P. ("JFLEI") and its 
affiliates became the owners of approximately 65% of the common equity of the 
Company, without giving effect to the exercise of certain options issued to 
management of the Company.

                                INDUSTRY OVERVIEW

     The Company operates within one industry segment, elastomer products. 
Virtually every industry contains applications for elastomeric products. 
These products are used wherever there is a need for materials that are 
flexible, yet retain their original shape and other properties. Elastomeric 
products tend to be a small portion of the total cost of any product, yet can 
be critical to a successful design. The Company believes that the demand for 
elastomeric products will continue to grow as the performance requirements of 
various products are increased.

     The Company serves a number of industries with significant usage of 
highly-engineered elastomer-based products. Customers in these industries 
value quality, on-time performance, and the ability to provide technical 
problem-solving capabilities. The increasingly complex product design effort 
of companies in these and other industries provides ongoing and new 
opportunities for elastomeric product applications. The Company believes that 
its technical resources, experience, and reputation provide it with a 
competitive advantage in seeking to provide products to these industries.

                              PRODUCTS AND MARKETS

     Within the elastomer products industry segment, the Company is organized 
into two business segments: silicone and organic products. The Company's 
products are further organized into three product groups: Aerospace and 
Defense Products, which produces precision silicone seals and other products 
used on commercial and military aircraft; Flooring Products, which produces 
and distributes rubber and vinyl cove base and other floor covering accessory 
products; and Commercial Products, which produces various intermediate and 
finished silicone and organic rubber products. Burke is a leader in a number 
of markets where the Company's vertically integrated production capabilities 
and design, engineering and manufacturing expertise result in a strong 
competitive position.

AEROSPACE AND DEFENSE PRODUCTS

     Operating out of Santa Fe Springs, California and Taunton, 
Massachusetts, Burke, through its Aerospace and Defense Products business, is 
the leading domestic manufacturer of two principal product lines: highly 
engineered elastomer-based seals for commercial and military aircraft and 
low-observable, radar-absorbing materials for stealth military applications. 
Burke's non-stealth aerospace components are marketed under the SFS and 
Haskon trade names. Burke first entered the aerospace market in 1993 with its 
purchase of Purosil. Aerospace and Defense Products sales increased from $3.6 
million in 1993 to $33.8 million in 1998.

     PRODUCTS

     Burke's major aerospace seals products include: aerodynamic seals for 
commercial and military airframes, firewall seals for aircraft engines and 
nacelles, aircraft door and hatch seals, inflatable seals for cockpit 
canopies and large openings, aircraft window seals, and aircraft conductive 
seals for 

                                       2
<PAGE>

electromagnetic interference survivable conditions. Burke's product line 
ranges from the most basic extruded seals, costing less than $100, to 
exceptionally complex seals which may cost in excess of $10,000. Burke's 
design and engineering teams have a history of developing solutions for 
difficult sealing and shielding problems. Burke's silicone seals are also 
reinforced (if required) with a variety of materials including Kevlar, 
Dacron, Nomex, ceramic cloth, fiberglass, conductive fabrics, metal mesh, 
nylon and other materials which accommodate their demanding applications.

     During the late 1980s and early 1990s, SFS invested significant capital 
towards the research and development of radar-absorbing and signature-masking 
composite materials. This initial research and development established SFS as 
the technological leader in this niche defense-related area. Burke has 
continued the development of this technology since its acquisition of SFS and 
Haskon in 1995. Generally, Burke works on an exclusive basis with the United 
States military to test and develop these highly engineered and technical 
materials. Once a contract has been awarded, Burke has historically become 
the sole supplier to the United States government as an approved defense 
contractor. Based on its history and the Company's proven record in this 
area, management believes that Burke will remain a critical partner in 
product development opportunities in this sector. Burke maintains a 
classified area within the Santa Fe Springs facility where stealth technology 
products are developed, manufactured and tested.

     MARKETS AND CUSTOMERS

     Burke's silicone seals are sold directly to manufacturers of commercial 
and military aircraft, aerospace component distributors and the United States 
government. Burke has maintained its leading position in this market through 
its advanced in-house design, engineering, technical and production 
capabilities coupled with superior customer service. The engineering staff at 
Burke works directly with OEMs to design custom silicone sealing 
applications. Burke's Aerospace and Defense products are designed by Burke 
engineers in accordance with precise OEM specifications and quality 
requirements. Products are rigorously tested against ISO and OEM standards by 
Burke and its customers before final approval. In 1998, the top five 
customers of the Aerospace and Defense Products division accounted for $23.2 
million in net sales, representing 21.7% and 68.9%, respectively, of the 
Company's total and the Aerospace and Defense Product division's net sales in 
that year.

     Boeing is the single largest customer of Aerospace and Defense Products, 
and management believes Burke is likewise the leading supplier of these 
products to Boeing. In addition to Boeing, the Company produces seals for 
every major commercial aircraft manufacturer in the world and for 
substantially all major military manufacturers in the United States, 
including McDonnell Douglas (now Boeing), Lockheed Martin, Northrop Grumman, 
Airbus Industries, Pratt & Whitney, General Electric, Gulfstream, Bombardier 
and B.F. Goodrich Aerostructures. As a result, Burke's products have been 
designed into some of the most successful commercial and military aircraft in 
the world, including the Boeing 717, 737, 747, 757, 767 and 777, the 
McDonnell Douglas DC and MD series, the Northrop Grumman F-14 and the 
Lockheed Martin L1011.

     Burke's advanced Aerospace and Defense Products business has 
successfully introduced several technologies in use by branches of the United 
States Navy, Air Force and Army. These include radar-absorbing seals 
and other composite materials utilized on the B-2 bomber, the F-22 
fighter and naval surface ships. Ground-based and amphibious vehicle 
applications are also being developed. The Burke radar-absorbing material 
technology has potentially much broader applications than are currently in 
use, and the Company is presently involved in initiatives that management 
believes will greatly expand the market for its advanced Aerospace and 
Defense Products business.


                                       3
<PAGE>

     The Northrop Grumman B-2 radar-resistant materials program provides a 
solid base for expansion of Burke's Aerospace and Defense business. Burke's 
revenues from this program are generated both by new aircraft production and 
by replacement materials applied as part of the repair or scheduled 
maintenance of the aircraft. Burke has also been qualified to supply the F-22 
program. The F-22 is the latest generation United States Air Force fighter 
aircraft and is designed to replace the F-15 as the premier fighter in the 
United States military arsenal in approximately two years. However, both the 
B-2 bomber and the F-22 fighter are subject to continuous budgetary scrutiny 
and Burke's ability to expand its Aerospace and Defense Products business 
could be limited if either of these programs were to be curtailed or 
eliminated.

     The advanced Aerospace and Defense Products business is also in the 
final phase of redesign and qualification for the "over-wing-fairing" seal 
for the B-1 bomber. Flight qualification will be followed by production 
proposals in 1999. The Company has also bid on a contract to develop seals 
for the new Joint Strike Fighter (JSF) program. Both Boeing and Lockheed 
Martin have been selected as the finalists for this program which is 
ultimately expected to procure approximately 3,000 multi-service aircraft for 
the United States Air Force, Marine Corps and Navy and the United Kingdom 
Royal Navy. The program is scheduled for production after the year 2005.

     COMPETITION

     Burke is the largest domestic supplier of highly-engineered silicone 
seals for the aerospace OEM market and aftermarket. Burke's domestic 
competitors are primarily small, privately-held companies which generally 
lack Burke's track record, long-term OEM relationships and capabilities. 
These competitors include Kirkhill Rubber Company, which was purchased by 
Esterline Technologies in 1998, Chase-Walton Elastomers, Inc. and Elastomeric 
Silicone Products, which was purchased by Bestobell Aviation in 1997. 
Additionally, the Company has two principal European competitors, Dunlop 
France S.A. and Bestobell Aviation, of the United Kingdom, which enjoy 
significant market share among European aircraft manufacturers, including 
Airbus Industries.

     Management believes that Burke's long-standing customer relationships, 
unique design capabilities and superior product quality will continue to 
support its position as the leading supplier of engineered silicone seals 
within this fragmented market.

     Burke is one of only a few companies with the combination of knowledge 
and manufacturing capabilities required to develop, test and manufacture 
engineered elastomer-based products to military specifications. Many of 
Burke's advanced Aerospace and Defense Products are classified in nature, and 
in many cases project leaders return to previous classified product suppliers 
for a preliminary assessment of future development opportunities.

FLOORING PRODUCTS

     Burke is a leading producer and distributor of specialty rubber and 
vinyl flooring accessory products for use in commercial markets. Flooring 
Products sales were $41.1 million in 1998, comprising 38% of the Company's 
total net sales.


                                       4
<PAGE>

     Burke's trademark BurkeBase has enjoyed a dominant market share in the 
western United States since the early 1950s and is well known throughout the 
industry. Burke extended its Flooring Products lines beyond rubber products 
through the Mercer acquisition. Founded in 1958, and headquartered in Eustis, 
Florida, Mercer established itself as a leading manufacturer of plastic and 
vinyl products such as vinyl and rubber wall base, transitional and finish 
mouldings, stair treads and other accessories. Mercer also sold a range of 
related adhesive products. The product and distribution lines developed by 
Mercer strongly complement the Company's Flooring Products business. While 
the Company has been the dominant producer of rubber cove base and floor 
covering accessories in the western United States, Mercer has been a leading 
supplier to the vinyl wall base and moulding products markets and developed a 
particularly strong sales presence in the eastern United States.

     PRODUCTS

     The combined line of BurkeMercer Flooring Products consists of a 
full range of commercial rubber and vinyl flooring products and accessories 
including rubber and vinyl cove base, flooring tiles, stair treads, corners, 
shapes, special application adhesives and newly developed luminescent 
emergency lighting accessories sold under the BurkeEmerge trademark. 
BurkeMercer flooring and flooring accessory products are generally recognized 
by architects, builders, and contractors as the highest-quality commercial 
rubber flooring and flooring accessory products available in terms of 
construction, durability and ease of installation. In its principal markets, 
BurkeMercer cove base is utilized in most commercial applications using 
resilient tile flooring and virtually all commercial applications involving 
carpeting. Other BurkeMercer flooring products are employed in commercial and 
institutional settings where durability and resilience are of primary 
importance.

     Rubber flooring products are generally more expensive than vinyl 
products due to their material and manufacturing cost but yield a 
longer-lasting product. However, vinyl flooring products are extremely 
popular for less demanding applications and are the predominant commercial 
flooring construction material in geographic regions outside of the western 
United States. The addition of a vinyl cove base product line creates a 
lower-cost, complementary offering targeted at less demanding, more 
cost-sensitive applications.

     MARKETS AND CUSTOMERS

     BurkeMercer Flooring Products are sold primarily to dealers and 
distributors in the western United States and through a network of flooring 
products distributors in other regions. In addition to the San Jose, 
California and Eustis, Florida manufacturing facilities, the Company has 
distribution facilities in Santa Fe Springs, California, Rancho Cucamonga, 
California, Bensonville, Illinois, and South Kearny, New Jersey. In 1998, the 
top five customers of the Flooring Products division accounted for $9.7 
million in net sales, representing 9.0% and 23.5%, respectively, of Burke's 
total and the Flooring Products division's net sales in that year.


                                       5
<PAGE>

     COMPETITION

     While there are a number of companies, both large and small, servicing 
the floor covering market, Burke is the largest producer of rubber cove base 
in the western United States. Burke's focus over many years on this 
specialized niche has created significant brand awareness and customer 
loyalty. The Mercer acquisition increases Burke's competitive advantage by 
adding several new vinyl-based product lines that have significant brand 
awareness and customer loyalty in the eastern United States. Burke's primary 
competitors in flooring accessory products include Roppe Corporation, 
Johnsonite, Flexco and Vinyl Plastics Incorporated.

COMMERCIAL PRODUCTS

     Burke's Commercial Products business serves end markets with both 
intermediate and finished silicone and organic rubber-based compounds and 
products. Commercial Products net sales increased from $14.8 million in 1993 
to $32.2 million in 1998, and represented 30% of the Company's total net 
sales in 1998.

     PRODUCTS

     PUROSIL PRODUCTS. Burke manufactures and markets a wide range of private 
label and Purosil-branded engineered silicone hose products for 
high-pressure, heat-sensitive applications. These high-performance products 
are sold primarily to OEMs and the aftermarket for heavy-duty trucks and 
buses. Burke was the first silicone hose producer in the industry to become 
ISO 9002 certified and is preparing for QS 9000 certification. The Company 
guarantees the performance of certain higher quality silicone truck hoses for 
1,000,000 miles and experiences negligible product returns and warranty 
claims each year. The Company also manufactures silicone hose products for 
applications in the powerboat, potable water and food service industries.

     New product development is an important focus within this group. Purosil 
has responded to recent market demand with newly designed 
charged-activated-coupling and knitted hose products for specific 
applications within the Class 8 truck market. These additions have 
strengthened the silicone hose product line and increased Burke's penetration 
of the OEM market.

     Burke leased an additional facility of approximately 56,000 square feet 
beginning in mid 1998. This facility is devoted to the manufacture and 
distribution of Purosil products and is expected to help to increase 
efficiency and customer service levels for all of the Company's 
silicone-based products.

     MEMBRANE PRODUCTS. Burke's membrane products business utilizes the 
Company's elastomer-based manufacturing expertise to produce high-end, 
single-ply commercial roof-covering systems and flexible liner membranes. 
Commercial roofing systems are sold into the new roofing and re-roofing 
markets under the Burkeline trade name and have been installed in large and 
small commercial and institutional facilities around the world. The Company's 
membrane products are also used as reservoir liners and floating potable and 
waste water covers.

     Burke's roofing and liner membrane systems are designed with DuPont's 
patented Hypalon polymer material, which is an extremely durable and flexible 
material, widely regarded as the highest-quality single-ply product available 
in the commercial roofing and membrane market. Burke's membrane products 
typically incorporate structural fabric laminated between thin layers of 
Hypalon. Burkeline 


                                       6
<PAGE>

roofing systems are installed by Burke-approved contractors and technical 
assistants and are fully warranted for up to 30 years.

     Membrane liners and covers are used primarily for protective purposes in 
potable water and wastewater projects. The liners and covers are most often 
used to protect against contamination of potable water during its storage and 
transfer. Hypalon is one of the few polymers which meets environmental 
standards regarding sanctioned potable water contact materials. Burke's 
in-house technical and engineering groups work directly with municipal 
engineers and with distributors and fabricators to assist in the design, 
testing and selection of the final product. Burke also manufactures and 
provides a full line of custom-made shrouds, gas vents, adhesives and other 
components necessary to produce a complete system package.

     CUSTOM PRODUCTS. The custom products group within Burke's Commercial 
Products division has capitalized on the Company's sophisticated formulation 
and production capabilities to become a value-added partner that collaborates 
closely with its customers in designing application-specific advanced 
products in both the silicone and organic rubber products markets. The group 
focuses on identifying high-margin products that complement its existing 
product lines and utilize excess production capacity. These custom products 
are typically complex blending and compounding formulations serving as 
intermediate or finished products for manufacturers of specialty rubber 
products and include oil drilling equipment components, road tape, rocket 
motor insulation and surface ship bow domes.

     MARKETS AND CUSTOMERS

     Management believes that the Company is the only approved supplier of 
silicone hoses to Mack Trucks. Burke's automotive hose products are also 
designed and specified into model builds of other major Class 8 truck OEMs 
including Peterbilt and Freightliner.

     Burke's membrane roofing products are sold both to distributors and 
directly to end-users who favor higher-quality roofing systems and who select 
Burke based on its reputation for quality. These roofing systems are 
typically employed in high value-added applications where quality, as 
measured by durability and ease of maintenance, is critical.

     Burke's liner membrane products are used in applications which are 
typically outsourced by municipalities on a bid basis and take several months 
to complete. Burke's covers and liners are sold to distributors and 
fabricators who heat weld the Hypalon-constructed sheets together to create a 
final product. It is not unusual for Burke to work with multiple distributors 
who are bidding for the same municipal project.

     Most of Burke's customers of the custom products unit are repeat users 
and range from large industrial companies to niche manufacturers producing 
specialized elastomeric products. Burke has developed long-standing 
relationships with a broad base of customers as a supplier of both 
intermediate and finished products whose technical complexities are suited to 
its unique capabilities. Burke markets these products using direct and 
independent sales representatives in both the United States and Europe. In 
1998, the top five customers of the Commercial Products division accounted 
for $8.6 million in net sales, representing 8.1% and 26.9%, respectively, of 
the Company's total and the Commercial Products division's net sales in that 
year.

                                       7
<PAGE>

     COMPETITION

     The marketplace for engineered silicone hose applications is supplied by 
three principal companies: Flexfab Horizons International, Thermopol 
Incorporated and the Company.

     In both roofing and liner systems, Burke competes with other 
Hypalon-based product manufacturers and with lower-cost alternatives. Leading 
manufacturers of these alternative systems include JPS Elastomerics Corp. and 
Carlisle Companies, Inc. Each has significant single-ply membrane roofing 
businesses and emphasize their membrane products manufactured from 
alternative materials as lower-cost, higher-volume products. Their Hypalon 
offerings represent a small portion of their aggregate sales.

     There are a number of manufacturers that compete in custom-mixing and 
product formulation business, although management believes that only a few 
match Burke's comprehensive capabilities in terms of its research, design, 
materials compounding, engineering and laboratory testing resources. Burke's 
custom products product line has developed a reputation for solving complex 
formulation problems and is staffed with experienced compounding 
professionals.

                               SALES AND MARKETING

     Burke's sales and marketing personnel are organized by product lines. 
Based on the nature of the markets served and the established distribution 
channels in a particular segment, products are sold either directly to 
end-users or through distributors and independent sales representatives. 
Burke's Aerospace and Defense Products business has long-standing direct 
relationships with OEMs and aftermarket suppliers to the aerospace industry 
and supports these relationships by integrating its engineering and operating 
groups during the design, tooling and production phases of a customer's 
project. Burke solidifies its relationships through ongoing technical support 
throughout the life of a project.

     Burke's Flooring Products business sells through a direct sales effort 
and through flooring products distributors. Management believes the recently 
consolidated BurkeMercer product line will enable Burke to (i) increase its 
number of first-tier distributors, specifically in the midwest and east, who, 
in the past, have not carried Burke products due to Burke's lack of a vinyl 
product offering, and (ii) displace other vinyl suppliers with distributors 
that already carry Burke's rubber flooring products line. The Flooring 
Products business currently utilizes 16 direct sales representatives who 
manage direct sales and orchestrate the Company's national marketing efforts 
through approximately 345 commercial flooring products distributor locations.

     Burke's Commercial Products businesses utilize several different sales 
and marketing approaches due to the scope of their product offerings. 
Purosil's high-performance silicone hoses are sold directly to OEMs in the 
heavy-duty truck and bus market. The Company also manufactures a number of 
"standard" product hoses which are marketed through sales representatives and 
a national network of distributors. The other commercial products that Burke 
produces are primarily sold through specialized in-house representatives 
adept at identifying potential customers who can benefit from Burke's 
vertically integrated manufacturing, compound formulation and engineering 
capabilities.

                                  MANUFACTURING

RAW MATERIALS

     Principal raw materials purchased by the Company for use in its products 
include various custom and standard grades of rubber, silicone gum and vinyl 
as well as the Hypalon polymer material. The 

                                       8
<PAGE>

Company has historically not experienced any significant supply restrictions 
and has generally been able to pass through increases in the price of these 
materials to customers. In 1995, however, the Company experienced a 
significant price increase in one of the raw materials used in the 
manufacture of one of its Flooring Products. Due to the competitive nature of 
the Flooring Products business and the Company's proprietary formula for this 
product, the Company was unable to fully pass this price increase along to 
its consumers and its gross margins for this product were adversely affected. 
Although the Company does not currently anticipate that it will experience 
any similar price increases for this or any other raw material used by the 
Company in the near future, there can be no assurance that such price 
increases will not occur and that the Company's results of operations will 
not be adversely affected thereby.

VERTICAL INTEGRATION

     Burke's operations are vertically integrated for the production of both 
silicone and organic rubber-based products. The Company's production process 
commences with the receipt of raw materials, followed by a variety of 
production steps which generally include mixing, milling, calendering (or 
extrusion or stripping), forming and molding and, in the case of silicone, 
roto-curing. Management believes Burke's vertical integration provides a key 
competitive advantage within the markets it serves.

                                OTHER INFORMATION

BACKLOG AND WARRANTY

     The Company's backlog consists of cancelable orders and is dependent 
upon trends in consumer demand throughout the year. Customer order patterns 
vary from year to year, largely because of annual differences in consumer 
end-product demand, marketing strategies, overall economic and weather 
conditions. Orders for the Company's products are generally subject to 
cancellation until shipment. As a result, comparison of backlog as of any 
date in a given year with backlog at the same date in a prior year is not 
necessarily indicative of sales trends. Moreover, the Company does not 
believe that backlog is necessarily indicative of the Company's future 
results of operations or prospects.

     The Company's warranty policy is to accept returns of products with 
defects in materials or workmanship. The Company will also accept returns of 
incorrectly shipped goods where the Company has been notified on a timely 
basis and, in certain cases, to maintain customer goodwill. In accordance 
with normal industry practice, the Company ordinarily accepts returns only 
from its customers and does not ordinarily accept returns directly from 
consumers. Certain of the products returned to the Company by its customers, 
however, may have been returned to those customers by consumers. The Company 
generally warrants its roofing products for two years, for which the related 
costs are not significant. In addition, the Company sells extended warranties 
on roofing products for ten to thirty years. During the three-year period 
ended January 1, 1999, the Company incurred insignificant warranty costs with 
respect to its roofing products.

EMPLOYEES

     At January 1, 1999, the Company employed 1,058 employees at its various 
locations, including 935 involved in manufacturing and manufacturing support 
and 74 involved in product sales. Employees at the Company's various 
locations receive comparable insurance and benefit programs. Burke's 
employees at the San Jose and Taunton locations are represented by the 
International Association of Machinists and Electrical Workers Unions, 
respectively. The collective bargaining agreement for the Taunton location 
was renegotiated in June 1997 for a three-year term and the agreement for the 
San Jose 

                                       9
<PAGE>

location was renegotiated in October 1997 for a three-year term. Burke's 
employees at the Eustis, Florida location are represented by the Glass, 
Molders, Pottery, Plastics and Allied Workers International Union. This 
collective bargaining agreement was renegotiated in December 1998 for a 
three-year term. The Company has not experienced a work stoppage due to a 
labor dispute since 1975 and management believes that the Company's 
relationships with its employees and unions are good.

PATENTS, TRADEMARKS, TRADE NAMES AND TRADE SECRETS

     The success of the Company's various businesses depends in part on the 
Company's ability to exploit certain proprietary patents, trademarks, trade 
names and trade secrets on an exclusive basis in reliance upon the 
protections afforded by applicable copyright, patent and trademark laws and 
regulations. The loss of certain of the Company's rights to such patents, 
trademarks, trade names and trade secrets or the inability of the Company 
effectively to protect or enforce such rights could adversely affect the 
Company. The duration of the Company's intellectual property rights is as 
follows:

PATENTS

<TABLE>
<CAPTION>

        PATENT NO.                              TITLE                                     GATT EXPIRY
        ----------            --------------------------------------------                -----------
        <S>                   <C>                                                         <C>
        4,608,792             Roof membrane holdown system                                 11/12/08
        4,603,790             Tensioned reservoir cover, rainwater run-off                  3/11/05
                              enhancement system
</TABLE>

TRADEMARKS

<TABLE>
<CAPTION>
                                          MARK                                   EXPIRATION
        ----------------------------------------------------------------------   ----------
        <S>                                                                       <C>
        VAC-Q-ROOF............................................................     12/1/02
        ROULEAU...............................................................     12/1/02
        BURKEBASE.............................................................      6/4/05
        SURETITE..............................................................      7/4/01
        BURKE INDUSTRIES......................................................     4/19/07
        ARGONAUT..............................................................      4/1/09
        DOCKSIDERS & DESIGN...................................................    11/26/05
        MAXXI-TREAD...........................................................     8/20/05
        MERCER FRICTION GRIP..................................................    12/03/08
        MERCER & DESIGN.......................................................    12/14/03
        MERCER................................................................     8/30/04
        MIRROR-FINISH.........................................................     7/20/03
        RUBBERLYTE............................................................     2/14/09
        RUBBERMYTE............................................................     7/23/01
        UNICOLOR..............................................................     4/05/04
</TABLE>

ENVIRONMENTAL LIABILITY

     The Company is subject to various evolving federal, state and local 
environmental laws and regulations governing, among other things, emissions 
to air, discharge to waters and the generation, handling, storage, 
transportation, treatment and disposal of hazardous and non-hazardous 
substances and wastes. These laws and regulations provide for substantial 
fees and sanctions for violations and, in many cases, could require the 
Company to remediate a site to meet applicable legal requirements. In 

                                       10
<PAGE>

connection with the Recapitalization, JFLEI conducted certain investigations 
(including, in some cases, reviewing environmental reports prepared by 
others) of the Company's operations and its compliance with applicable 
environmental laws. The investigations, which included Phase I assessments 
(consisting generally of a site visit, records review and non-intrusive 
investigation of conditions at the subject facility) by independent 
consultants, found that certain facilities have had or may have had releases 
of hazardous materials that may require remediation. Pursuant to the Merger 
Agreement (as defined below), the former shareholders of the Company have 
agreed, subject to certain limitations as to survival and amount, to 
indemnify the Company against certain environmental liabilities incurred 
prior to the consummation of the Recapitalization. Based in part on the 
investigations conducted and the indemnification provisions of the Agreement 
and Plan of Merger, dated as of August 13, 1997 (the "Merger Agreement") 
among JFLEI, JFL Merger Co. ("MergerCo") and certain former shareholders of 
the Company (pursuant to which the Company was recapitalized by means of a 
merger of MergerCo into the Company (the "Merger") with the Company surviving 
the Merger) with respect to environmental matters, the Company believes, 
although there can be no assurance, that its potential obligations relating 
to these environmental matters will not have a material adverse effect on its 
future financial position or results of operations.

     In connection with the Mercer acquisition, the Company conducted an 
environmental review of Mercer's operations and its compliance with 
applicable environmental laws. The review included a site visit to Mercer's 
manufacturing facility in Eustis, Florida and interviews with facility 
personnel regarding environmental matters. In addition, the Company reviewed 
existing environmental reports that included Phase I assessments, audits and 
limited soil and ground water sampling data. The environmental review 
revealed that Mercer's facilities have had, or may have had, releases of 
hazardous substances that may require remediation. Pursuant to the Stock 
Purchase Agreement, the former shareholders of Mercer have agreed, subject to 
certain limitations as to survival and amount, to indemnify the Company 
against certain environmental liabilities incurred prior to the purchase. 
Based, in part, on the environmental review conducted by the Company and the 
indemnification provisions of the Stock Purchase Agreement with respect to 
environmental matters, the Company believes, although there can be no 
assurance, that its potential obligations relating to these environmental 
matters will not have a material adverse effect on its future financial 
position or results of operations. The Company does not maintain a reserve 
for environmental liabilities.

ITEM 2. PROPERTIES

FACILITIES

     San Jose, California serves as the corporate headquarters for Burke as 
well as one of the manufacturing sites for the Flooring Products business and 
the organic rubber portion of the Commercial Products businesses. Santa Fe 
Springs, California is the manufacturing headquarters for Burke's silicone 
production activities and houses most of its Aerospace and Defense Products 
and all of its silicone Commercial Products businesses. Along with the 
industrial hose production, the Aerospace and Defense Products business 
classified development and production areas are also located at the Santa Fe 
Springs facility. The Taunton, Massachusetts facility is the manufacturing 
site for Burke's Haskon aerospace operations. This location provides Burke 
with an alternative eastern United States manufacturing presence for its 
aerospace customers.


                                       11


<PAGE>

     Burke's Flooring Products are produced in San Jose, California and 
Eustis, Florida. In addition, the Company leases and operates large 
distribution centers in Santa Fe Springs, California, Rancho Cucamonga, 
California, Bensonville, Illinois and South Kearny, New Jersey.

     The Company believes that its facilities are in good condition and that 
the facilities, together with anticipated capital improvements and additions, 
are adequate for the Company's operating needs for the foreseeable future.

     As of March 15, 1999, Burke maintained operations at the following 
locations:

<TABLE>
<CAPTION>
                                    SQUARE
            LOCATION                FOOTAGE    OWNERSHIP                           FUNCTION
-----------------------------       -------    ---------       -------------------------------------------------
<S>                                 <C>         <C>            <C>
San Jose, CA.................       123,000     Owned          Manufacturing, Engineering, Distribution, Offices
San Jose, CA.................        82,000     Leased         Manufacturing, Warehouse
Santa Fe Springs, CA.........        80,000     Leased         Manufacturing, Engineering, Distribution, Offices
Santa Fe Springs, CA.........        56,000     Leased         Manufacturing, Engineering, Distribution, Offices
Santa Fe Springs, CA.........        25,000     Leased         Mixing
Santa Fe Springs, CA.........        25,000     Leased         Warehouse, Distribution
Taunton, MA..................        85,000     Leased         Manufacturing, Engineering, Distribution, Offices
Bensonville, IL..............        15,000     Leased         Warehouse, Distribution
Eustis, FL...................        96,500     Owned          Manufacturing, Engineering, Distribution, Offices
Rancho Cucamonga, CA                 22,000     Leased         Warehouse, Distribution
South Kearny, NJ.............        25,000     Leased         Warehouse, Distribution
</TABLE>

     In addition to the facilities identified above, the Company leases a 
113,000 square foot facility in Modesto, California, which is subleased to 
the purchaser of the Company's custom-molded products business in connection 
with the sale of that business in 1996.

ITEM 3. LEGAL PROCEEDINGS

     The Company is routinely involved in legal proceedings related to the 
ordinary course of its business. Management does not believe any such matters 
will have a material adverse effect on the Company. The Company maintains 
property, general liability and product liability insurance in amounts which 
it believes are consistent with industry practices and adequate for its 
operations.

     On or about December 28, 1997, a former employee filed a complaint in 
the California Superior Court for the County of Santa Clara against the 
Company and certain of the Company's current and former officers and 
directors. On March 11, 1998, the plaintiff filed an amended complaint 
against the same defendants. The former employee alleges that he was induced 
to sell his stock in the Company to the Company and/or to the officer and 
director defendants in August 1996 through the use of allegedly false and/or 
misleading statements. The Company believes that such claims are without 
merit and intends to continue to vigorously defend such action. In this 
regard, on October 5, 1998, defendants answered the complaint and, in 
addition, filed a cross-complaint against the plaintiff for breach of 
contract. Defendants' cross-claim alleges that the plaintiff breached the 
terms of a general release he executed at the time he left the employ of the 
Company in 1996 and certain covenants set forth therein.

     On or about May 5, 1998, a former employee of Mercer filed a lawsuit in 
U.S. District Court Middle District of Florida against Mercer and Sovereign, 
the former owner of Mercer. The former employee made various claims for 
relief on the grounds that she was allegedly the victim of certain 

                                       12
<PAGE>

harassment, discrimination, retaliation and negligence. Pursuant to certain 
indemnification provisions contained in the Stock Purchase Agreement between 
the Company, Mercer and Sovereign, dated March 5, 1998, as amended by 
Amendment No. 1 to the Stock Purchase Agreement, dated April 21, 1998, Mercer 
tendered its defense to Sovereign and Sovereign agreed, through its counsel, 
to defend Mercer against the allegations asserted against Mercer by the 
former employee. Following Mercer's merger into the Company, the Company 
became a defendant in the lawsuit. In order to avoid the expenses associated 
with further litigation, including a possible trial, on or about February 2, 
1999, the parties entered into a confidential settlement agreement pursuant 
to which the plaintiff agreed voluntarily to dismiss her claims against the 
Company without any admission of liability on the part of the Company. 
Although the terms of the settlement agreement are confidential, the 
settlement agreement included no terms that have had, or will have in the 
future, any material impact on the Company's business, financial condition or 
results of operations.

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

     None.

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

COMMON EQUITY DIVIDENDS

     The Company's Common Stock is not listed or traded on any exchange. At 
January 1, 1999, there were approximately 13 holders of the Company's Common 
Stock.

     The Company has not paid any cash dividends on its Common Stock to date. 
The Company intends to retain all future earnings for use in the development 
of its business and does not anticipate paying cash dividends in the 
foreseeable future. The payment of all dividends will be at the discretion of 
the Company's Board of Directors and will depend upon, among other things, 
future earnings, operations, capital requirements, the general financial 
condition of the Company and general business conditions. The ability of the 
Company and its subsidiaries to pay dividends is restricted by the indentures 
governing the $110,000,000 principal amount of Senior Notes Due 2007 and the 
Floating-Rate Notes (defined below) and, with respect to the Common Stock, 
the Company's Articles of Incorporation.

RECENT SALES OF UNREGISTERED SECURITIES

     In connection with the Mercer acquisition, on April 17, 1998, the 
Company issued $30,000,000 principal amount of Floating Interest Rate Senior 
Notes due 2007 of the Company (the "Floating-Rate Notes") to NationsBanc 
Montgomery Securities LLC (the "Initial Purchaser"). The aggregate price to 
the public of the Floating-Rate Notes was $30,000,000 and the aggregate 
initial purchaser's discounts and commissions were $900,000 resulting in 
aggregate proceeds to the Company of $29,100,000. The Company sold the 
Floating-Rate Notes in reliance on the exemption provided by Section 4(2) of 
the Securities Act of 1933, as amended. The Initial Purchaser subsequently 
resold the Floating-Rate Notes in reliance on Rule 144A under the Securities 
Act of 1933, as amended. The Floating-Rate Notes were registered by the 
Company pursuant to a Registration Statement on Form S-4, File No. 333-36675, 
as filed with the Securities and Exchange Commission on June 19, 1998.

                                       13
<PAGE>

     In connection with the Mercer acquisition, the Company also sold 3,000 
shares of Series C 6% Convertible Preferred Stock ("Series C Convertible 
Preferred Stock") for aggregate consideration of $3 million. The Series C 
Convertible Preferred Stock was sold to all of the shareholders and 
warrantholders who elected to participate in the subscription offering. Upon 
the occurrence of certain triggering events, the holders of the Series C 
Convertible Preferred Stock are entitled to convert such shares into the 
Company's Common Stock at a price of $10 per share.

ITEM 6. SELECTED FINANCIAL DATA

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

     The selected consolidated financial data below for the Company for the 
three years ended January 1, 1999 and as of January 1, 1999 and January 2, 
1998 have been derived from the Consolidated Financial Statements of the 
Company which have been audited by Ernst & Young LLP, independent auditors, 
and are included elsewhere in this Report. The selected consolidated 
financial data below for the Company for the years ended December 30, 1994 
and December 29, 1995 and as of December 30, 1994 and December 29, 1995, and 
January 3, 1997 have been derived from the Consolidated Financial Statements 
of the Company which have also been audited by Ernst & Young LLP, but which 
are not included elsewhere herein. The information presented below is 
qualified in its entirety by, and should be read in conjunction with, 
"Management's Discussion and Analysis of Financial Condition and Results of 
Operations," the Consolidated Financial Statements of the Company and the 
related notes included elsewhere in this Report. The data below reflect the 
acquisition by the Company of certain assets of Purosil in March 1993; of 
Silicone Fabrication Specialists, Inc. ("SFS") in February 1995; of Haskon 
Corporation ("Haskon") in June 1995; of Kentile Corporation ("Kentile") in 
April 1996; of Mercer Products Company, Inc. ("Mercer") in April 1998, and 
the effect of the Recapitalization in August 1997.








                                       14
<PAGE>


<TABLE>
<CAPTION>
                                                                               FISCAL YEAR
                                                    ------------------------------------------------------------------
                                                      1994          1995          1996           1997           1998
                                                      ----          ----          ----           ----           ----
                                                                         (DOLLARS IN THOUSANDS)
<S>                                                 <C>           <C>           <C>            <C>            <C>
OPERATING DATA:
Net sales.....................................      $44,370       $68,411       $72,466        $90,228        $107,019
Cost of sales.................................       29,998        49,226        49,689         62,917          77,053
                                                     ------        ------        ------         ------          ------
Gross profit..................................       14,372        19,185        22,777         27,311          29,966
Selling, general and administrative expenses..        8,152        10,212        11,610         12,238          15,957
Transaction expenses(1).......................           --            --            --          1,321              --
Stock option purchase(2)......................           --            --            --         14,105              --
                                                    -------       -------       -------         ------         -------
Income (loss) from operations.................        6,220         8,973        11,167           (353)         14,009
Interest expense, net.........................        2,812         3,007         2,668          5,408          13,819
                                                    -------       -------       -------         ------         -------

Income (loss) before income tax provision 
   (benefit), cumulative effect of
   accounting change, extraordinary loss
   and discontinued operation(3)..............        3,408         5,966         8,499         (5,761)            190
Income tax provision (benefit)................        1,395         3,393         3,466         (1,818)            160
                                                    -------       -------       -------         ------         -------
                                          
Income (loss) from continuing operations 
 before cumulative effect of accounting
   change, extraordinary loss and
   discontinued operation(3)..................       $2,013        $2,573        $5,033        $(3,943)           $ 30
                                                    -------       -------       -------         ------         -------
Net income (loss)(3)..........................       $1,502        $1,094        $4,101        $(3,943)           $ 30
                                                    -------       -------       -------         ------         -------
                                                    -------       -------       -------         ------         -------
                                          
OTHER DATA:
EBITDA(4).....................................       $7,490       $10,461       $12,586        $16,851(5)      $17,184
EBITDA margin(4)..............................         16.9%         15.3%         17.4%          18.7%(5)        16.1%
Depreciation and amortization.................        1,270         1,488         1,419          1,499           3,175
Capital expenditures(6).......................          335         3,647         1,684          1,454           3,220
Cash interest expense.........................        2,438         2,683         1,950          2,059          12,223
Ratio of earnings to fixed charges(7).........          2.1x          2.8x          3.7x            --             1.0x
</TABLE>

<TABLE>
<CAPTION>
                                                                          AS OF FISCAL YEAR END
                                                    ------------------------------------------------------------------
                                                      1994          1995          1996           1997          1998
                                                      ----          ----          ----           ----          ----
                                                                         (DOLLARS IN THOUSANDS)
<S>                                                  <C>           <C>           <C>           <C>           <C>
BALANCE SHEET DATA:
Working capital...............................       $4,766        $5,402        $5,328        $21,678       $18,946
Total assets..................................       28,551        39,729        40,673         62,837        93,945
Long-term obligations, less current portion...       16,937        21,803        18,126        110,000       140,000
Shareholders' equity (deficit)................          849           340         4,283        (86,490)      (85,472)

</TABLE>

(1)  Reflects $1,321 of expenses associated with the Recapitalization in August
     1997.

(2)  Reflects the Company's cost to purchase options issued and outstanding
     under the Company's stock option plan in connection with the
     Recapitalization in August 1997.

(3)  Net income reflects (i) extraordinary loss on debt settlement, net of
     income tax benefit, of $815 in 1995 and (ii) losses, net of income tax
     benefit, of $511, $664 and $308 in 1994, 1995 and through June 28, 1996,
     respectively, incurred by the Company's custom-molded organic rubber
     products manufacturing operations, the assets of which were disposed of in
     June 1996, and loss, net of income tax benefit, of $624 in 1996 on disposal
     of those assets.

(4)  EBITDA is the sum of income (loss) before cumulative effect of changes in
     accounting principles, extraordinary loss, discontinued operation, income
     tax provision (benefit) and interest, depreciation and amortization
     expense. EBITDA is presented because it is a widely accepted financial
     indicator of a company's ability to service indebtedness. However, EBITDA
     should not be considered as an alternative to income from operations or to 
     cash flows from 

                                      15
<PAGE>

     operating activities (as determined in accordance with generally accepted 
     accounting principles) and should not be construed as an indication of a 
     company's operating performance or as a measure of liquidity.

(5)  Reflects EBITDA excluding costs of stock option purchase, transaction
     expenses related to the Recapitalization and management fees paid to a
     former controlling shareholder.

(6)  Capital expenditures include the acquisition of assets of SFS for $1,578
     and Haskon for $2,081 in 1995, of Kentile for $854 in 1996. Capital
     expenditures in 1998 include $1,408 for a replacement information
     technology system, which will be completed in 1999.

(7)  In calculating the ratio of earnings to fixed charges, earnings consist of
     income (loss) before income tax provision (benefit), cumulative effect of
     accounting change, extraordinary loss and discontinued operation plus fixed
     charges (excluding capitalized interest). Fixed charges consist of interest
     incurred (which includes amortization of deferred financing costs) whether
     expensed or capitalized and a portion of rental expense estimated to be
     attributable to interest. Earnings were insufficient to cover fixed charges
     by $5.8 million for fiscal year ended 1997.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

     This Report contains certain forward-looking statements and information 
relating to the Company that are based on the beliefs of management as well 
as assumptions made by and information currently available to management. The 
words "anticipates," "believes," "estimates," "expects," "plans," "intends" 
and similar expressions, as they relate to the Company or its management, are 
intended to identify forward-looking statements. Such statements reflect the 
current views of the Company, with respect to future events and are subject 
to certain risks, uncertainties and assumptions, that could cause actual 
results to differ materially from those expressed in any forward-looking 
statement, including, without limitation: competition from other 
manufacturers in the Company's aerospace, flooring or commercial product 
lines, loss of key employees, general economic conditions and adverse factors 
impacting the aerospace industry such as changes in government procurement 
policies. Should one or more of these risks or uncertainties materialize, or 
should underlying assumptions prove incorrect, actual results may vary 
materially from those described herein as anticipated, believed, estimated or 
expected. The Company does not intend to update these forward-looking 
statements.

INTRODUCTION

     The following discussion and analysis should be read in conjunction with 
"Selected Historical Consolidated Financial Data" and the audited 
Consolidated Financial Statements of the Company and the notes thereto 
included elsewhere in this Report.

     The Company operates within one industry segment, elastomer products, 
and is organized into two business segments: silicone and organic products. 
The Company's products are organized into three product groups: Aerospace and 
Defense Products, which produces precision silicone seals and other products 
used on commercial and military aircraft; Flooring Products, which produces 
and distributes rubber and vinyl cove base and other floor covering accessory 
products; and Commercial Products, which produces various intermediate and 
finished silicone and organic rubber products.

     Burke entered the Aerospace and Defense Products business through the 
acquisition of Purosil's assets in 1993. The Company subsequently expanded 
its Aerospace and Defense Products business by purchasing the assets of two 
of its largest competitors, SFS and Haskon, in 1995. These acquisitions were 
completed in order to broaden Burke's Aerospace and Defense Products line and 
to incorporate advanced military stealth capability into this product group. 
Subsequent to these acquisitions, in 

                                      16
<PAGE>

December 1995, the Company integrated all of its aerospace operations in 
anticipation of increased demand as communicated by aircraft OEMs.

     In general, Aerospace and Defense Products seals revenues are driven by 
both the building of new aircraft by OEM manufacturers and the repair and 
replacement of existing aircraft ("aftermarkets"). OEMs typically depend on a 
select group of suppliers to provide their seal requirements, working closely 
with them to design the customized tooling necessary to satisfy the 
industry's rigorous product testing standards. As a result of the Company's 
consolidation efforts throughout the mid-'90s, Burke is now positioned as the 
leading seals supplier for the domestic commercial aircraft industry and is 
OEM-specified on virtually every existing commercial and military aircraft 
platform in production. Revenues of low-observable seals and materials are 
derived from both the retrofit of existing aircraft, such as the B-1 bomber 
and the initial installation and replacement of existing low-observable 
material on aircraft, such as the B-2 bomber.

     Historically, revenues in the Flooring Products business have been 
driven by both new commercial construction and the continuous repair and 
remodeling of existing commercial space. Until recently, operations have been 
concentrated in the western United States and Burke has sold primarily rubber 
cove base moulding. The Company has developed a well-known brand name 
(BurkeBase) in the western United States by targeting the architectural 
community and installers of commercial flooring. Growth in Flooring Products 
revenues was significant in 1998 due to improvement in the commercial 
construction market in the western United States and the acquisition of 
Mercer.

     The Commercial Products business is comprised of: (i) Purosil brand 
high-performance silicone truck and bus engine hoses; (ii) roofing and other 
fluid barrier membrane products; and (iii) various intermediate and end use 
products based upon Burke's extensive elastomer manufacturing capabilities. 
Revenues generated by silicone hose sales are driven by both new truck and 
bus manufacturing as well as the replacement market. OEM and aftermarket 
customers specify and prefer silicone hoses due to their high performance and 
relatively minor absolute cost. In addition, silicone hoses are increasingly 
being specified on trucks and buses due to the higher performance 
requirements of new engine design. Burke roofing and fluid containment system 
sales have tended to be relatively steady over time. Roofing and fluid 
barrier membranes are used in numerous applications including new and 
replacement commercial roofs and reservoirs. The Hypalon product provides 
significant wear and durability advantages compared with less expensive 
products. Revenues from these products can be materially affected on a 
quarter-to-quarter basis by the size and timing of certain reservoir projects.



                                      17


<PAGE>

RESULTS OF OPERATIONS

     The following table sets forth certain income statement information for 
the Company for the fiscal years ended January 3, 1997, January 2, 1998, and 
January 1, 1999:

<TABLE>
<CAPTION>
                                                                 FISCAL YEAR ENDED
                                               PERCENTAGE                  PERCENTAGE                   PERCENTAGE
                                    1996      OF NET SALES      1997      OF NET SALES       1998      OF NET SALES
                                    ----        ----------      ----      ------------       ----        ----------
                                                              (DOLLARS IN THOUSANDS)
<S>                                <C>             <C>         <C>            <C>           <C>            <C>
Net sales:
Aerospace and Defense Products..       $24,622         34.0%       $31,225         34.6%        $33,766         31.6%
Flooring Products...............        20,546         28.4         23,475         26.0          41,091         38.4
Commercial Products.............        27,298         37.6         35,528         39.4          32,162         30.0
                                        ------         ----         ------         ----          ------         ----
Total net sales.................        72,466        100.0         90,228        100.0         107,019        100.0
Cost of sales...................        49,689         68.6         62,917         69.7          77,053         72.0
                                        ------         ----         ------         ----         -------        -----
                                
Gross profit....................        22,777         31.4         27,311         30.3          29,966         28.0
Selling, general and
   administrative expenses......        11,569         16.0         12,174         13.6          14,546         13.6
Transaction costs...............            --          --           1,321          1.5              --         --
Stock option purchase...........            --          --          14,105         15.6              --         --
Amortization of Goodwill........            41          --              64           --           1,411          1.3
                                        ------         ----         ------         ----           -----         ----
Income (loss) from operations...        11,167         15.4           (353)        (0.4)         14,009         13.1
Interest expense, net...........         2,668          3.7          5,408          6.0          13,819         12.9
                                        ------         ----         ------         ----         -------        -----
Income (loss) before income
   tax provision (benefit),
   extraordinary loss and
   discontinued operation.......         8,499         11.7         (5,761)        (6.4)            190          0.2
Income tax provision (benefit)..         3,466          4.8         (1,818)        (2.0)            160          0.2
                                        ------         ----         -------       ------           ----        -----
Income (loss) from continuing
   operations before
   extraordinary loss and
   discontinued operation.......        $5,033          6.9%       $(3,943)        (4.4)%           $30         --
                                        ------         ----         -------       ------           ----        -----
                                        ------         ----         -------       ------           ----        -----
Net income (loss)...............        $4,101          5.7%       $(3,943)        (4.4)%           $30         --
                                        ------         ----         -------       ------           ----        -----
                                        ------         ----         -------       ------           ----        -----
</TABLE>

     YEAR ENDED JANUARY 1, 1999 VERSUS YEAR ENDED JANUARY 2, 1998

     NET SALES. Total net sales increased 18.6%, from $90.2 million in 1997 
to $107.0 million in 1998. Aerospace and Defense Products sales grew 8.1%, 
due primarily to increased demand for military products. Flooring Products 
sales increased 75.0%, due primarily to the acquisition of Mercer. Commercial 
Products sales decreased 9.5%, primarily because 1997 included a liner 
project order that favorably affected results for that period, partially 
offset by volume associated with new products introduced during 1998 by the 
silicone hose portion of this product group.

     COST OF SALES. Cost of sales increased 22.5%, from $62.9 million in 1997 
to $77.1 million in 1998. As a percentage of net sales, gross profit 
decreased from 30.3% to 28.0%. The decrease in profit percentage was 
primarily due to temporary operating inefficiencies, both in connection with 
new product ramp-up, and also in connection with the silicone products' 
facility expansion which occurred in July, 1998.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and 
administrative expenses increased 18.9%, from $12.2 million in 1997 to $14.5 
million in 1998. The increase in spending was 

                                      18
<PAGE>

primarily due to the acquisition of Mercer. As a percentage of net sales, 
selling, general and administrative expenses remained constant.

     TRANSACTION EXPENSES AND STOCK OPTION PURCHASE. Transaction expenses and 
stock option purchase were one-time expenses associated with the leveraged 
recapitalization in August, 1997.

     AMORTIZATION OF GOODWILL. Amortization of goodwill increased to $1.4 
million in 1998. The increase was due to the acquisition of Mercer.

     INCOME FROM OPERATIONS. As a result of the above factors, income from 
operations increased from a loss of $0.4 million in 1997 to income of $14.0 
million in 1998.

     INTEREST EXPENSE. Interest expense increased 155.5%, from $5.4 million 
in 1997 to $13.8 million in 1998. The increase was due to the issuance of the 
Senior (fixed-rate) Notes on August 20, 1997 and the Floating-Rate Notes on 
April 21, 1998.

     INCOME FROM CONTINUING OPERATIONS. As a result of the above factors, 
income from continuing operations increased from a loss of $3.9 million in 
1997 to income of less than $0.1 million in 1998.

     YEAR ENDED JANUARY 2, 1998 VERSUS YEAR ENDED JANUARY 3, 1997

     NET SALES. Total net sales increased 24.5%, from $72.5 million in 1996 
to $90.2 million in 1997. Aerospace and Defense Products sales grew 26.8%, 
due to strong expansion of commercial aircraft build rates. Despite this 
overall performance, revenue for low-observable materials decreased in the 
second half of the year due to material product design changes by major 
customers, which delayed shipments of these materials. Flooring Products 
sales grew 14.3% due to price increases and generally stronger demand for 
construction products in California and the introduction of vinyl cove base 
products. Commercial Products sales grew 30.1% due to a major sale of 
membrane products for a liner application and due to orders from a new 
customer.

     COST OF SALES. Cost of sales increased 26.6% from $49.7 million in 1996 
to $62.9 million in 1997. The increase was primarily due to the increase in 
net sales over the same period. As a percentage of net sales, gross profit 
decreased from 31.4% in 1996 to 30.3% in 1997. The decrease was due primarily 
to the fact that membrane products, which have a lower gross profit margin 
than the Company's other product lines, constituted a larger portion of total 
net sales in 1997 compared with 1996.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and 
administrative expenses increased 5.4%, from $11.6 million in 1996 to $12.2 
million in 1997. The increase included the addition of Flooring and 
Commercial sales personnel. However, as a percentage of net sales, these 
costs declined from 16.0% to 13.6% over the same period.

     TRANSACTION EXPENSES AND STOCK OPTION PURCHASE. Transaction expenses 
were incurred in connection with the Recapitalization. The stock option 
purchase charge in 1997 represents the compensation component of payments 
made for the cancellation of stock options in connection with the 
Recapitalization.

     INCOME FROM OPERATIONS. As a result of the above factors, income from 
operations decreased 103.2%, from $11.2 million in 1996 to a loss of $(0.4) 
million in 1997.

                                      19
<PAGE>

     INTEREST EXPENSE. Interest expense increased 102.7%, from $2.7 million 
in 1996 to $5.4 million in 1997. The increase was due to the issuance of the 
Senior Notes on August 20, 1997.

     INCOME FROM CONTINUING OPERATIONS. As a result of the above factors, 
income from continuing operations decreased 178.3%, from $5.0 million in 1996 
to a loss of $(3.9) million in 1997.

INCOME TAX PROVISION

     For 1998, the Company recorded an income tax provision of $160,000 which 
differed from the federal statutory rate primarily due to filing requirements 
in certain states as a result of the Mercer acquisition.

     For 1996 and 1997, the Company recorded an income tax provision 
(benefit) of 40.8% and (31.6%), respectively, which differs from the federal 
statutory rate primarily due to state income taxes (net of federal benefit) 
and in 1997 due to additional provision for federal and state audits. In 
1996, the Company settled with the Internal Revenue Service ("IRS") certain 
issues relating to the Company's income tax returns for 1988 through 1990. As 
of January 3, 1997, the Company had fully provided for the taxes and interest 
which are payable as a result of the settlement.

     In addition to the above settlement, in 1997, the Company settled with 
the IRS certain issues related to the Company's income tax returns for 1992 
and 1993. The Company fully provided for the taxes and interest which are 
payable as a result of the settlement.

LIQUIDITY AND CAPITAL RESOURCES

     CASH FLOW. The Company's principal uses of cash are to finance working 
capital and capital expenditures related to asset acquisitions and internal 
growth. Burke's net cash provided by operating activities was $6.0 million in 
1998. Excluding the charge related to the stock option purchase, Burke's net 
cash provided by operating activities would have been $5.6 million in 1997.

     CAPITAL REQUIREMENTS. The Company expects to spend approximately $2.5 
million during 1999 on capital expenditures not directly related to 
acquisitions. In 1998, $3.2 million was spent on capital expenditures not 
directly related to acquisitions, including $1.4 million for a replacement 
information technology system that will be completed in 1999. Cash flow from 
operations, to the extent available, may also be used to fund a portion of 
any acquisition expenditures.

     SOURCES OF CAPITAL. On April 21, 1998, the Company acquired all of the 
issued and outstanding capital stock of Mercer, from Sovereign, for an 
aggregate purchase price of $38,474,000 (including acquisition costs of 
$2,280,000).

     Financing for this acquisition and related expenses was provided, in 
large part, from the sale of (the "Offering") $30 million principal amount of 
Floating-Rate Notes Due 2007. The balance of the financing was provided with 
$3.0 million from the sale of 3,000 shares of the Company's 6% Series C 
Cumulative Convertible Preferred Stock (the "Series C Convertible Preferred 
Stock") and cash on hand.

     The Floating-Rate Notes mature on August 15, 2007, with interest on the 
notes payable semi-annually on February 15 and August 15, commencing August 
15, 1998. The Floating-Rate Notes bear interest at a rate per annum equal to 
LIBOR plus 400 basis points, with the interest rate reset semiannually. The 
Floating-Rate Notes are unconditionally guaranteed on a joint and several 
basis by each of the Company's subsidiaries. Upon a change of control of the 
Company, the Company will be 

                                      20
<PAGE>


required to make an offer to repurchase all outstanding Floating-Rate Notes 
at 101% of the aggregate principal amount thereof plus accrued and unpaid 
interest thereon at the date of repurchase.

     Contemporaneously with the Mercer acquisition, the Company amended its 
existing Loan and Security Agreement, as amended from time to time, with 
NationsBank, N.A., as administrative agent, and other lending institutions 
party thereto (the "Credit Agreement") to, among other things, (i) increase 
the Company's borrowing capacity from $15.0 million to $25.0 million (as 
amended, the "Credit Facility"), (ii) add Mercer as a borrowing subsidiary 
(as defined in the Credit Agreement), (iii) increase certain of the baskets 
contained in the restrictive covenants to reflect the increased size of the 
Company after the closing of the Mercer acquisition and (iv) waive any 
default or event of default that may otherwise have resulted from the 
consummation of the Offering and the Mercer acquisition. Following the merger 
of Mercer with and into Burke, which occurred in August 1998, Mercer was no 
longer a borrowing subsidiary under the Credit Agreement.

     The Credit Facility matures in August 2002. Interest on loans under the 
Credit Facility bear interest at rates based upon either, at the Company's 
options, Eurodollar Rates plus a margin of 2.5% or upon the Prime Rate. Loans 
under the Credit Facility are secured by security interests in substantially 
all of the assets of the Company and are guaranteed by any and all current or 
future subsidiaries of the Company, which guarantees are secured by 
substantially all of the assets of such subsidiaries. The Credit Facility 
contains customary covenants restricting the Company's ability to, among 
other things, incur additional indebtedness, create liens or other 
encumbrances, pay dividends or make other restricted payments, make 
investments, loans and guarantees or sell or otherwise dispose of a 
substantial portion of assets to, or merge or consolidate with, another 
entity. The Credit Facility also contains a number of financial covenants 
that will require the Company to meet certain ratios and tests and provide 
that a change of control of the Company (as defined in the Credit Facility) 
will constitute an event of default. At fiscal year end 1998, the Company was 
not in compliance with certain of these covenants. The Company obtained a 
waiver from the bank and future covenants have been amended.

     The Company anticipates that its principal use of cash during 1999 will 
be working capital requirements, debt service requirements and capital 
expenditures. Based upon current and anticipated levels of operations, the 
Company believes that its cash flow from operations, together with amounts 
available under the Credit Facility, will be adequate to meet its anticipated 
requirements for the foreseeable future for working capital, capital 
expenditures and interest payments.

YEAR 2000 ISSUE

     GENERAL DESCRIPTION OF THE YEAR 2000 ISSUE AND THE NATURE AND EFFECTS OF 
THE YEAR 2000 ON INFORMATION TECHNOLOGY (IT) AND NON-IT SYSTEMS

     The Year 2000 issue ("Year 2000 Issue") is the result of computer 
programs being written using two digit rather than four to define the 
applicable year. Any of the Company's computer programs or hardware that have 
date-sensitive software or embedded chips may recognize a date using "00" as 
the year 1900 rather than the Year 2000. This could result in a system 
failure or miscalculation causing disruptions of operations, including, among 
other things, a temporary inability to process transactions, send invoices, 
or engage in similar normal business activities.

     Based on recent assessments, the Company determined that it had to modify
or replace significant portions of its software and certain hardware so that
those systems will properly utilize dates beyond December 31, 1999. The Company
presently believes that with modifications or replacements of existing 

                                      21
<PAGE>

software and certain hardware, the Year 2000 Issue can be mitigated. However, 
if such modifications and replacements are not made, or are not timely 
completed, the Year 2000 Issue could have a material impact on the operations 
of the Company.

     The Company's plan to resolve the Year 2000 Issue involves the following 
three phases: assessment, remediation, and testing. To date, the Company has 
fully completed its assessment of all systems that could be significantly 
affected by the Year 2000 Issue. The completed assessment indicated that most 
of the Company's significant information technology systems could be 
affected, particularly the general ledger, billing, and inventory systems. 
That assessment also indicated that software and hardware (embedded chips) 
used in production and manufacturing systems do not represent significant 
risks. The Company does not believe that the Year 2000 presents a material 
exposure as it relates to the Company's products.

     STATUS OF PROGRESS IN BECOMING YEAR 2000 COMPLIANT

     With respect to its information technology, the Company is 50% complete 
on the remediation phase and expects to complete software and hardware 
replacement no later than June 30, 1999. Completion of the testing phase for 
all significant systems is expected by June 30, 1999.

     The Company is utilizing both internal and external resources to replace 
and test the software and hardware for resolution of the Year 2000 Issue. In 
conjunction with the Company's current $2.2 million information technology 
systems re-engineering effort, approximately 50% of the total cost is 
estimated to be related to the Year 2000 project. Most of the cost of the new 
system will be funded through a lease.

     NATURE AND LEVEL OF IMPORTANCE OF THIRD PARTIES AND THEIR EXPOSURE TO 
THE YEAR 2000 ISSUE

     The Company has no significant systems which would interface directly 
with third party vendors. To date, the Company is not aware of any external 
agent with a Year 2000 Issue that would materially impact the Company's 
results of operations, liquidity, or capital resources. The Company has sent 
out questionnaires to external agents during the first quarter of 1999 in an 
effort to verify the external agents' Year 2000 readiness. However, the 
Company has no means of ensuring that the external agents will be Year 2000 
ready. The inability of external agents to complete their Year 2000 
resolution process in a timely fashion could materially impact the Company. 
The effect of non-compliance by external agents is not determinable.

     RISKS

     Management believes it has an effective program in place to resolve the 
Year 2000 Issue in a timely manner. As noted above, the Company has not yet 
completed all necessary phases of its Year 2000 program. In the event that 
the Company does not complete any additional phases, the Company might be 
unable to take customer orders, manufacture and ship products, invoice 
customers or collect payments. In addition, disruptions in the economy 
generally resulting from the Year 2000 Issue could also materially adversely 
affect the Company. The amount of potential liability and lost revenue cannot 
be reasonably estimated at this time.

     CONTINGENCY PLANS

     The Company currently has no contingency plans in place in the event it 
does not complete all phases of the Year 2000 program. The Company plans to 
evaluate the status of completion in the second quarter of 1999 and determine 
whether such a plan is necessary.


                                      22
<PAGE>


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company is exposed to market risks related to fluctuations in 
interest rates on its Senior Notes and Floating-Rate Notes. The Company does 
not currently use interest rate swaps or other types of derivative financial 
instruments.

     For fixed rate debt such as the Senior Notes, changes in interest rates 
generally affect the fair value of the debt instrument. For variable rate 
debt such as the Floating-Rate Notes, changes in interest rates generally do 
not affect the fair value of the debt instrument, but do affect earnings and 
cash flows. The Company does not have an obligation to repay its Senior Notes 
prior to maturity in 2007 and, as a result, interest rate risk and changes in 
fair value should not have a significant impact on the Company. Management 
believes that the interest rate on the Senior Notes approximates the current 
rates available for similar types of financing and as a result the carrying 
amount of the Senior Notes approximates fair value. The carrying value of the 
Floating-Rate Notes approximates fair value as the interest rate is variable 
and resets frequently. The Floating-Rate Notes bear interest at a rate per 
annum equal to LIBOR plus 400 basis points and each one percentage point 
increase in interest rates would result in an increase in interest expense of 
$300,000 per year.

     Management does not believe that the future market rate risk related to 
the Senior Notes and Floating-Rate Notes will have a material impact on the 
Company's financial position, results of operations or liquidity.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The Consolidated Financial Statements required in response to this Item 
are listed under Item 14(a) of Part IV of this Report.

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

     None.


                                      23



<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The following table sets forth the name, age and position of each person 
who is a director or executive officer of the Company as of March 15, 1999. 
Each director will hold office until the next annual meeting of the 
shareholders or until his successor has been elected and qualified. Officers 
will be elected by the Board of Directors and will serve at the discretion of 
the Board.

<TABLE>
<CAPTION>

NAME                                      AGE                                  POSITIONS
----                                      ---                                  ---------
<S>                                        <C>     <C>
Rocco C. Genovese...................       62      Vice Chairman of the Board, President and Chief Executive Officer
Reed C. Wolthausen..................       51      Director, Senior Vice President
David E. Worthington................       45      Treasurer, Vice President--Finance
Robert F. Pitman....................       44      Vice President and Technical Director--San Jose
Hisham Alameddine...................       40      Vice President--Operations--San Jose
Thomas G. Keup......................       51      Vice President--Operations--Eustis, Florida
Craig A. Carnes.....................       39      Vice President--Sales and Marketing--Flooring Products
Martin J. Suydam, Jr................       55      President--Silicone Products Group
Anthony E. Lawson...................       44      Vice President and General Manager--Silicone Products Group
Robert P. Harrison..................       63      Vice President--Aerospace and Defense--Haskon Operations
Robert G. Engle.....................       57      Vice President--Operations--Santa Fe Springs
Ronald A. Stieben...................       51      Vice President--Sales and Marketing--Purosil
George Sawyer.......................       67      Chairman of the Board
Oliver C. Boileau, Jr...............       72      Director
Donald Glickman.....................       65      Director
Bruce D. Gorchow....................       45      Director
John F. Lehman......................       56      Director
Keith Oster.........................       37      Director
Thomas G. Pownall...................       77      Director
Joseph A. Stroud....................       43      Director

</TABLE>

     ROCCO C. GENOVESE, Vice Chairman, President and Chief Executive Officer, 
has been with the Company for 43 years. Mr. Genovese joined Burke in 1955 and 
has held a number of operations and sales positions within the Company since 
that time. Mr. Genovese assumed his current role as President and Chief 
Executive Officer in 1989. He is active in all aspects of Burke's business 
and is a participant in several industry associations.

     REED C. WOLTHAUSEN, Senior Vice President, has been with the Company for 
ten years. Initially serving as the Company's Chief Financial Officer, Mr. 
Wolthausen now manages Burke's information technology systems re-engineering 
effort and other strategic issues. Prior to joining Burke, he served as Chief 
Financial Officer for Micronix Corp. and as Controller for Velo-Bind, Inc.

     DAVID E. WORTHINGTON, Treasurer and Vice President--Finance, has been 
with the Company for eight years. Mr. Worthington joined Burke as Corporate 
Controller in 1990 and served in that capacity until 1997 when he was 
promoted to his current position. Prior to joining the Company, he served as 
Chief Financial Officer for Electro-Technology Corporation.

     ROBERT F. PITMAN, Vice President and Technical Director--San Jose, has 
been with the Company since 1979 and currently oversees all technical and 
product development for the San Jose-based businesses as well as sales and 
marketing for the San Jose portion of the Commercial Products business. 
During his tenure with Burke, Mr. Pitman has held a number of positions 
including Director of Technical Services and Material/Process Development 
Engineer. He has served in his current position since 1994.


                                      24
<PAGE>


     HISHAM ALAMEDDINE, Vice President--Operations--San Jose, has been with 
the Company for seven years. Before serving in his current position, Mr. 
Alameddine served as Director of Engineering Services for the Company. Prior 
to joining Burke, Mr. Alameddine was the Vice President of Manufacturing for 
Sonfarrel, Inc. and has held senior operations positions with two other 
companies.

     THOMAS G. KEUP, Vice President--Operations--Eustis, Florida, joined the 
Company in April 1998 when Burke purchased Mercer. Mr. Keup joined Mercer in 
1991 as Operations Manager and became Director of Operations in 1993. Prior 
to joining Mercer, Mr. Keup was Director of Technology for Chelsea Building 
Products from 1989 to 1991. Mr. Keup is a member of the Society of Plastic 
Engineers and the SPS Vinyl Division Technical Program Committee.

     CRAIG A. CARNES, Vice President--Sales and Marketing--Flooring Products, 
joined the Company in 1996. Prior to joining the Company, Mr. Carnes was Vice 
President of Sales and Marketing for Color Spot, Inc., a subsidiary of 
Pacificorp and a consumer perishable product company that is the nation's 
largest producer of garden bedding flowers. For five years prior to joining 
Color Spot, Inc., Mr. Carnes held senior sales and marketing positions with 
Levolor Corporation, an industry leader and manufacturer of hard window 
coverings.

     MARTIN J. SUYDAM, JR., President--Silicone Products Group, joined the 
Company in November 1998. For five years prior to joining the Company, Mr. 
Suydam was the President and a Senior Consultant of FOCUS Consulting Inc., an 
independent consulting firm in Virginia which specializes in Business 
Management and Business Development services. Prior to founding FOCUS, Mr. 
Suydam was Vice President of Business Development for the BMY Defense Group 
where his responsibilities included overall Washington operations for the 
Group's tracked and wheeled vehicle product lines. Prior to joining BMY, Mr. 
Suydam also served as Vice President and General Manager of West Coast 
Operations for John J. McMullen Associates, an engineering firm specializing 
in naval architecture and marine engineering. Mr. Suydam also held positions 
as Corporate Vice President of Business Development and Planning for 
ALCOA/TRE (now Alcoa Composites), a wholly owned subsidiary of the Aluminum 
Company of America (ALCOA) and Vice President of Marketing (domestic and 
international) for General Dynamics Land Systems Division. Mr. Suydam has 
held senior executive positions with the U.S. government, including Director 
of Resources & Policy Evaluation for the Assistant Secretary of the Navy 
(Shipbuilding and Logistics) and as a policy analyst in the Office of the 
Secretary of Defense. Mr. Suydam retired from the Army Reserves as a Colonel 
after 31 years of military service.

     ANTHONY E. LAWSON, Vice President and General Manager--Silicone Products 
Group, joined the Company in May 1998. Prior to joining the Company, Mr. 
Lawson worked for Northrop Grumman from 1985 to September 1997 where he most 
recently held the position of Vice President and B-2 Deputy Program Manager 
responsible for 6,000 employees and daily program activities including 
engineering, business management, business development and manufacturing. Mr. 
Lawson also held positions at Northrop Grumman as Vice President of Pico 
Rivera Operations and Composites in the Military Aircraft Systems Division, 
Vice President of the Pico Rivera Operations in the B-2 Division, Vice 
President of Production in the B-2 Division, Final Inspection Operations 
Manager, Product Inspections Manager and Quality Assurance Manager. From 1980 
through 1983, Mr. Lawson held various positions at Rockwell International, 
including Supervisor, Quality Assurance in the NAOO Division, Supervisor, 
Quality and Reliability Assurance in the Space Division and Test Quality 
Engineer in the Space Division.

     ROBERT P. HARRISON, Vice President--Aerospace and Defense--Haskon 
Operations, joined the Company with the acquisition of Purosil in March 1993. 
Prior to Purosil, Mr. Harrison worked for Haskon Corporation ("Haskon") where 

                                      25
<PAGE>

he was a Vice President of Sales and Engineering, responsible for all of 
Haskon's sales and product engineering efforts in the aerospace industry in 
North America and Europe. From January 1972 to September 1981, Mr. Harrison 
was Superintendent of the Injection and Mechanical Molding Departments and 
the Urethane Coating Department of Beebe Rubber Company, a manufacturer of 
automobile and industrial molding goods. From September 1962 through December 
1971, Mr. Harrison held positions as a Manufacturing Manager of Chomerics, 
Inc., a manufacturer of shielding products and components for the electronics 
industry, a Production Manager for Bond Rubber Company and a General Foreman 
of the compounding, extrusion and molding departments of Haskon.

     ROBERT G. ENGLE, Vice President--Operations--Santa Fe Springs, joined 
Burke as Industrial Engineering Manager in 1986 and has since held the 
positions of Engineering Manager and Vice President of Manufacturing. Before 
joining Burke, Mr. Engle served as Manager of Engineering Services and Chief 
Industrial Engineer for Norton Company.

     RONALD A. STIEBEN, Vice President--Sales and Marketing--Purosil, has 
worked for the Company for three years. Prior to joining Burke, Mr. Stieben 
worked for 16 years at Kirkhill Rubber Company, one of Burke's competitors. 
He served as Vice President of Sales for Kirkhill for five years before 
joining Burke in 1995.

     GEORGE SAWYER, Chairman of the Board of Directors of the Company and a 
Managing Principal of Lehman, has been affiliated with Lehman for the past 
six years. From 1993-1995, Mr. Sawyer served as the President and Chief 
Executive Officer of Sperry Marine Inc. Prior to that, Mr. Sawyer held a 
number of prominent positions in private industry and in the United States 
government, including serving as the President of John J. McMullen 
Associates, the President and Chief Operating Officer of TRE Corporation, the 
Vice President of International Operations for Bechtel Corporation and the 
Assistant Secretary of the Navy for Shipbuilding and Logistics under Dr. 
Lehman. Mr. Sawyer is Chairman of Special Devices, Inc. and a director of 
Elgar Holdings, Inc. and also serves on the Board of Trustees of Webb 
Institute and is on the Board of Managers of the American Bureau of Shipping.

     OLIVER C. BOILEAU, JR., became a director of the Company upon 
consummation of the Recapitalization. He joined The Boeing Company in 1953 as 
a research engineer and progressed through several technical and management 
positions and was named Vice President in 1968 and then President of Boeing 
Aerospace in 1973. In 1980, he joined General Dynamics Corporation as 
President and a member of the Board of Directors. In January 1988, Mr. 
Boileau was promoted to Vice Chairman. He retired in May 1988. Mr. Boileau 
joined Northrop Grumman Corporation ("Northrop Grumman") in December 1989 as 
Vice President and President and General Manager of the B-2 Division. He also 
served as President and Chief Operating Officer of the Grumman Corporation, a 
subsidiary of Northrop Grumman, and as a member of the Board of Directors of 
Northrop Grumman. Mr. Boileau retired from Northrop Grumman in 1995. He is an 
Honorary Fellow of the American Institute of Aeronautics and Astronautics, a 
member of the National Academy of Engineering, the Board of Trustees of St. 
Louis University, and the Massachusetts Institute of Technology-Lincoln 
Laboratory Advisory Board. Mr. Boileau is also a director of Elgar Holdings, 
Inc. and Special Devices, Inc.

     DONALD GLICKMAN, became a director of the Company upon consummation of 
the Recapitalization and is a Managing Principal of Lehman. Prior to joining 
Lehman, Mr. Glickman was a principal of the Peter J. Solomon Company, a 
Managing Director of Shearson Lehman Brothers Merchant Banking Group and 
Senior Vice President and Regional Head of The First National Bank of 
Chicago. Mr. Glickman served as an armored cavalry officer in the Seventh 
U.S. Army. Mr. Glickman is currently Chairman of Elgar Holdings, Inc. and a 
director of the McNeal-Schwendler Corporation, General 

                                      26
<PAGE>

Aluminum Corporation, Special Devices, Inc. and Monroe Muffler Brake, Inc. He 
is also a trustee of MassMutual Participation Investors and Wolf Trap 
Foundation for the Performing Arts.

     BRUCE D. GORCHOW, became a director of the Company upon consummation of 
the Recapitalization and is a member of the investment advisory board of 
Lehman. Since 1991, Mr. Gorchow has been Executive Vice President and head of 
the Private Finance Group of PPM America, Inc. Mr. Gorchow is also a director 
of Global Imaging Systems, Inc., Leiner Health Products, Inc., Tomah 
Products, Inc. and Elgar Holdings, Inc. and is an investment director of 
several investment limited partnerships. Mr. Gorchow also represents PPM 
America, Inc. on the boards of ten of its portfolio companies. Prior to his 
position at PPM America, Mr. Gorchow was a Vice President at Equitable 
Capital Management, Inc.

     JOHN F. LEHMAN, became a director of the Company upon consummation of 
the Recapitalization and is a Managing Principal of Lehman. Prior to founding 
Lehman in 1990, Dr. Lehman was an investment banker with Paine Webber, Inc. 
from 1988 to 1990, and served as a Managing Director in Corporate Finance. 
Dr. Lehman served for six years as Secretary of the Navy, was a member of the 
National Security Council Staff, served as a delegate to the Mutual Balanced 
Force Reductions negotiations and was the Deputy Director of the Arms Control 
and Disarmament Agency. Dr. Lehman served as Chairman of the Board of 
Directors of Sperry Marine, Inc., and is a member of the Board of Directors 
of Elgar Holdings, Inc., Special Devices, Inc., Ball Corporation and ISO Inc. 
and is Chairman of the Princess Grace Foundation, a director of OpiSail 
Foundation and a trustee of LaSalle College High School.

     KEITH OSTER, became a director of the Company upon consummation of the 
Recapitalization and is a Principal of Lehman. Mr. Oster joined Lehman in 
1992 and is principally responsible for financial structuring and analysis. 
Prior to joining Lehman, Mr. Oster was with the Carlyle Group, where he was 
responsible for analyzing acquisition opportunities and arranging debt 
financing, and was a Senior Financial Analyst with Prudential-Bache Capital 
Funding, working in the Mergers, Acquisitions and Leveraged Buyout 
Department. Mr. Oster is also a director of Elgar Holdings, Inc. and Special 
Devices, Inc.

     THOMAS G. POWNALL, became a director of the Company upon consummation of 
the Recapitalization and is a member of the investment advisory board of 
Lehman. Mr. Pownall was Chairman of the Board of Directors from 1983 until 
1992 and Chief Executive Officer of Martin Marietta Corporation ("Martin 
Marietta") from 1982 until 1988. Mr. Pownall joined Martin Marietta 
Corporation in 1963 as Vice President of its Aerospace Advanced Planning 
Unit, became President of Aerospace Operations and, in succession, Vice 
President and President and Chief Operating Officer of Martin Marietta. Mr. 
Pownall is also a director of the Titan Corporation, Elgar Holdings, Inc. and 
Special Devices, Inc., Director Emeritus of Sundstrand Corporation, serves on 
the advisory boards of Ferris, Baker Watts Incorporated and is President of 
the American-Turkish Council. He is also a director of the U.S. Naval Academy 
Foundation and the Naval Academy Endowment Trust and a trustee of 
Salem-Teikyo University.

     JOSEPH A. STROUD, became a director of the Company in February 1998 and 
is a Principal of Lehman. Mr. Stroud has been affiliated with Lehman since 
1992 and formally joined the firm in 1996. He is responsible for managing the 
financial and operational aspects of portfolio company value-enhancement. 
Prior to joining Lehman, Mr. Stroud was the Chief Financial Officer of Sperry 
Marine, Inc. from 1993 until the company was purchased by Litton Industries, 
Inc. in 1996. From 1989 to 1993, 

                                      27
<PAGE>


Mr. Stroud was Chief Financial Officer of the Accudyne and Kilgore 
Corporations. Mr. Stroud is also a director of Elgar Holdings, Inc. and 
Special Devices, Inc.

CERTAIN RIGHTS OF HOLDERS OF REDEEMABLE PREFERRED STOCK

     Under certain circumstances, the holders of the Redeemable Preferred 
Stock may have the right to elect a majority of the directors of Company. See 
"Certain Relationships and Related Transactions--Shareholders Agreement."

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     The Board of Directors has established a Human Resources and 
Compensation Committee, consisting of Messrs. Lehman, Sawyer, Genovese, 
Glickman, and Stroud. The Compensation Committee assists the Board of 
Directors in its responsibilities for corporate governance relating to 
recruiting, appointing and compensating officers and directors and with 
respect to human resources policies and issues. During 1998, Mr. Genovese 
served as the Company's President and Chief Executive Officer.

ITEM 11. EXECUTIVE COMPENSATION

     The information set forth in this section relates to the Chief Executive 
Officer of the Company and the four most highly compensated executive 
officers of the Company as of January 1, 1999.

COMPENSATION SUMMARY

     The following summary compensation table sets forth for the fiscal years 
ended January 1, 1999, January 2, 1998 and January 3, 1997, the historical 
compensation for services to the Company of the Chief Executive Officer and 
the four most highly compensated executive officers (the "Named Executive 
Officers") as of January 1, 1999:

<TABLE>
<CAPTION>
                                                                                                       LONG-TERM
                                                               ANNUAL COMPENSATION(1)                COMPENSATION
                                                       -------------------------------------------   ------------
                                                                                                      SECURITIES
                                                                                                      UNDERLYING
NAME AND PRINCIPAL POSITION         FISCAL YEAR        SALARY ($)     BONUS ($)(2)    OTHER ($)(3)      OPTIONS
                                    -----------        ----------     ------------  --------------   ------------
<S>                                    <C>              <C>           <C>           <C>                  <C>
Rocco C. Genovese.                     1998             $233,651      $       --    $          --             --
President and Chief                    1997              196,925         317,500        5,579,314        150,000
Executive Officer                      1996              180,050         150,000               --        336,000

Reed C. Wolthausen                     1998              170,192              --               --             --
Senior Vice President                  1997              148,800         237,000        3,201,004        100,000
                                       1996              141,378         100,000               --        224,000

David E. Worthington                   1998              109,324          22,000               --             --
Vice President--Finance                1997               95,166         100,000          393,766         10,000
                                       1996               90,794          25,000               --             --

Craig A. Carnes                        1998              114,575          20,000               --             --
Vice President--Sales and              1997               94,231          25,000          161,710          7,500
   Marketing--Flooring                 1996               89,342          60,000               --         40,000
   Products

</TABLE>


                                      28
<PAGE>


<TABLE>

<S>                                    <C>               <C>                  <C>         <C>              <C>
Ronald A. Stieben                      1998              132,500              --               --             --
Vice President--Sales and              1997              130,000              --          183,757          7,500
Marketing--Purosil                     1996              130,000              --               --             --

</TABLE>



(1)  Perquisites and other personal benefits paid in 1998 for the Named
     Executive Officers aggregated less than the lesser of $50,000 and 10% of
     the total annual salary and bonus set forth in the columns entitled
     "Salary" and "Bonus" for each named executive officer and, accordingly, are
     omitted from the table.

(2)  Annual bonuses are indicated for the year in which they were earned and
     accrued. Annual bonuses for any year are generally paid in the following
     fiscal year.

(3)  Represents the compensation component of the consideration paid to the
     executives for their stock options in the Company in connection with the
     Recapitalization.

OPTIONS GRANTED IN 1998

     No options were granted in 1998 to the Named Executive Officers.

AGGREGATE OPTION PURCHASES IN LAST FISCAL YEAR-END AND FISCAL YEAR END OPTION 
VALUES

     The following table summarizes information with respect to the year-end 
values of all options held by Named Executive Officers.

<TABLE>
<CAPTION>

                                                                       NUMBER OF SECURITIES
                                                                            UNDERLYING
                                                                        UNEXERCISED OPTIONS    VALUE OF UNEXERCISED
                                        SHARES                          AT FISCAL YEAR-END     IN-THE-MONEY OPTIONS
                                      ACQUIRED ON                        (#) EXERCISABLE/       AT FISCAL YEAR-END
NAME                                   EXERCISE       VALUE REALIZED      $UNEXERCISABLE              ($)(1)
--------------------                  -----------     --------------    -------------------    --------------------
<S>                                       <C>              <C>          <C>                             <C>
Rocco C. Genoves                          0                0            37,500/112,500                  $0
Reed C. Wolthausen                        0                0             25,000/75,000                  $0
David E. Worthington                      0                0               2,500/7,500                  $0
Craig A. Carnes                           0                0               1,875/5,625                  $0
Ronald A. Stieben                         0                0               1,875/5,625                  $0
</TABLE>

(1)  There is no public market for the Company's Common Stock. The Company
     estimates that the market value for its Common Stock is $6.50 per share.

                              EMPLOYMENT AGREEMENTS

     In connection with the Recapitalization, the Company entered into 
employment agreements (each, an "Employment Agreement") with two key 
executives. Generally, each Employment Agreement 

                                      29
<PAGE>

provides for the executive's continued employment with the Company in his 
position prior to the execution of the Employment Agreement for a period of 
two years from the date of the Employment Agreement, renewable by mutual 
agreement for successive one-year terms, at an annual salary, bonus and with 
such other employment-related benefits comparable to those received by such 
executive immediately before the execution of the Employment Agreement.

     If the executive is terminated for Cause (as defined in the Employment 
Agreement) or voluntarily terminates his employment prior to the expiration 
of the then-current term, the executive will be entitled to receive unpaid 
compensation through the date of his termination or the date that is 30 days 
after notice of termination is given by the Company, whichever occurs later. 
If the executive's employment is terminated by the Company for any reason 
other than for Cause or the executive dies or is unable to perform his duties 
due to disability for a period of 90 consecutive days, the executive will be 
entitled to receive all compensation that would be due through the end of the 
then-current term, to the extent unpaid on the date of termination.

     Each Employment Agreement contains provisions prohibiting the executive, 
during the period of his employment with the Company and, for two years 
thereafter, from owning, managing, operating, financing, joining or 
controlling, directly or indirectly, any business entity that is, at the time 
of the executive's initial involvement, in competition with the Company in 
any business then or thereafter conducted by the Company. Each Employment 
Agreement also contains provisions requiring the executive to maintain the 
confidentiality of certain information related to the Company during the 
period of his employment with the Company and, under certain circumstances, 
for two years thereafter. Each Employment Agreement further provides that any 
proposals or ideas developed by the executive or that are submitted by the 
executive to the Company during the term of the Employment Agreement, whether 
or not exploited or accepted by the Company, are the property of the Company 
and may not be exploited by the executive except in compliance with the 
Company's policy on conflicts of interest.

                     EXECUTIVE DEFERRED COMPENSATION AGREEMENT

     The Company has established an Executive Deferred Compensation Agreement 
which is a deferred compensation plan for certain executive officers and 
other highly compensated officers of the Company. Commencing on December 1, 
1995 and continuing through the date on which the participant's employment 
with the Company terminates as a result of death, retirement, disability or 
any other cause, the participant is entitled to defer to an account an amount 
set forth in an annual election form, which the participant would otherwise 
be entitled to receive as compensation. Each participant's account accrues 
investment income based upon the investment election of the participant. Such 
deferred amounts are fully vested and are payable upon termination of 
employment, death, retirement or disability. The accumulated amount deferred 
in this plan as of fiscal year end 1998 was $0.5 million.

                               STOCK OPTION PLAN

     The Board of Directors of the Company has adopted the 1997 Stock Option 
Plan (the "Plan"), pursuant to which officers, directors and key employees of 
the Company and its parents and subsidiaries are eligible to receive options 
to purchase the Company's Common Stock. The Plan is administered by the Board 
of Directors. The aggregate number of shares which may be issued under 
options shall not exceed 500,000 shares, subject to adjustment under certain 
circumstances provided for in the Plan. Any stock option granted under the 
Plan may be an Incentive Stock Option (as defined in the Plan) or a 
non-qualified stock option. The price of Incentive Stock Options shall range 
from one hundred to one hundred and ten percent of the fair market value of 
the shares depending upon whether or not the optionee is a ten percent 
holder. The fair market value shall be determined by reference to market 
prices if the stock is publicly traded or shall be determined in good faith 
by the Board in the absence of a public market. Options granted under the 
Plan vest as determined by the Board. No option may be granted under the 
Plan more than ten years from the date of its adoption.

                                401(K) PLANS

     The Company maintains two defined contribution 401(k) plans. The first 
plan covers substantially all of the Company's non-hourly employees who are 
not employed in the Mercer business. The employees become eligible to 
participate after 1,000 hours of service and participants may elect to 
contribute up to 20% of their compensation to this plan, subject to Internal 
Revenue Service limits. The Company matches a portion of the employees' 
contribution. The Company also maintains a defined contribution plan for 
salaried and hourly employees who were formerly employed by Mercer. 
Participating employees contribute to this 401(k) plan based on a percentage 
of their compensation, which is matched by the Company based on a percentage 
of employee contributions.

                            COMPENSATION OF DIRECTORS

     None of the directors who are officers of the Company receives any 
compensation directly for their service on the Company's Board of Directors. 
All other directors receive customary directors' fees for their services. In 
addition, the Company pays Lehman certain fees for various management, 
consulting and financial planning services, including assistance in strategic 
planning, providing market and financial analyses, negotiating and 
structuring financing and exploring expansion opportunities. See "Certain 
Relationships and Related Transactions."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information regarding the 
ownership of the Company's Common Stock as of March 15, 1999 by (i) each 
director, (ii) each of the Named Executive Officers of the Company, (iii) all 
executive officers and directors as a group and (iv) each person who is the 
beneficial owner of more than 5% of the outstanding Common Stock of the 
Company.

<TABLE>
<CAPTION>

                                                                                           PERCENTAGE OF SHARES
NAME OF INDIVIDUAL OR ENTITY(1)                             NUMBER OF SHARES(2)               OUTSTANDING(3)
---------------------------------------------------         -------------------            --------------------
<S>                                                               <C>                               <C>
JFLEI(4)...........................................               3,134,298                         81.3%
John F. Lehman(5)..................................               3,134,298                         81.3
George Sawyer(5)...................................               3,134,298                         81.3
Donald Glickman(5).................................               3,134,298                         81.3
Keith Oster(5).....................................               3,134,298                         81.3
Joseph A. Stroud(5)................................               3,134,298                         81.3
Rocco C. Genovese(6)...............................                 278,500                          7.2
Reed C. Wolthausen(7)..............................                 218,602                          5.6
David E. Worthington(8)............................                  17,000                          *
Craig A. Carnes(9).................................                   7,175                          *
Ronald A. Stieben(9)...............................                   2,975                          *
Oliver C. Boileau, Jr.(10).........................                      --                         --
Thomas G. Pownall(11)..............................                      --                         --
Bruce D. Gorchow(12)...............................                      --                         --
</TABLE>

                                      30
<PAGE>

<TABLE>

<S>                                                               <C>                               <C>
Jackson National(13)...............................                 428,444                         10.0
MassMutual(13).....................................                 428,444                         10.0
All directors and executive officers as a group (20
persons)...........................................               3,688,200                         93.7%

</TABLE>

*    Less than 1%

(1)  The address of JFLEI and Messrs. Lehman, Sawyer, Glickman, Oster and Stroud
     is 2001 Jefferson Davis Highway, Suite 607, Arlington, Virginia 22202. The
     address of Jackson National and Mr. Gorchow is 225 West Wacker Drive,
     Chicago, Illinois 60606. The address of MassMutual is 1295 State Street,
     Springfield, Massachusetts 01111. The address of Paribas is 787 Seventh
     Avenue, New York, New York 10019.

(2)  As used in this table, beneficial ownership means the sole or shared power
     to vote, or to direct the voting of a security, or the sole or shared power
     to dispose, or direct the disposition of, a security.

(3)  Computed based upon the total number of shares of the Company's Common 
     Stock outstanding and the number of shares of the Company's Common Stock 
     underlying the options or warrants held by that person exercisable within 
     60 days of March 15, 1999. In accordance with Rule 13(d)-3 of the Exchange
     Act, any Common Stock that will not be outstanding as of March 15, 1999, 
     which is subject to options or warrants exercisable within 60 days, is 
     deemed to be outstanding for the purpose of computing the percentage of 
     outstanding shares of the Company's Common Stock owned by the person 
     holding such options or warrants, but is not deemed to be outstanding for 
     the purpose of computing the percentage of outstanding shares of the 
     Company's Common Stock owned by any other person. On a fully diluted basis,
     as of March 15, 1999, JFLEI and its affiliates would own approximately
     65% of the Company's Common Stock, the executive officers and directors
     as a group would own approximately 76.5% of the Company's Common Stock 
     and the warrantholders (including Jackson National, MassMutual and 
     Paribas) would have the right to purchase approximately 20% of the 
     Company's Common Stock.

(4)  JFLEI is a Delaware limited partnership managed by Lehman, which is an
     affiliate of the general partner of JFLEI. Each of Messrs. Lehman,
     Glickman, Sawyer, Oster and Stroud, either directly (whether through
     ownership interest or position) or through one or more intermediaries, may
     be deemed to control Lehman and such general partner. Lehman and such
     general partner may be deemed to control the voting and disposition of the
     shares of the Company Common Stock owned by JFLEI. Accordingly, for certain
     purposes, Messrs. Lehman, Glickman, Sawyer, Oster and Stroud may be deemed
     to be beneficial owners of the shares of the Company's Common Stock owned
     by JFLEI.

(5)  Includes the shares beneficially owned by JFLEI, of which Messrs. Lehman,
     Glickman, Sawyer, Oster and Stroud are affiliates.

(6)  Includes options to purchase 37,500 shares of Common Stock issued under the
     Company's 1997 Stock Option Plan, which are currently exercisable.

(7)  Includes options to purchase 25,000 shares of Common Stock issued under the
     Company's 1997 Stock Option Plan, which are currently exercisable.

(8)  Includes options to purchase 2,500 shares of Common Stock issued under the
     Company's 1997 Stock Option Plan, which are currently exercisable.

(9)  Includes options to purchase 1,875 shares of Common Stock issued under the
     Company's 1997 Stock Option Plan, which are currently exercisable.

(10) Mr. Boileau is a limited partner of JFLEI.

(11) Mr. Pownall is a limited partner of JFLEI and is on the investment advisory
     board of Lehman.

(12) Mr. Gorchow is on the investment advisory board of Lehman.

(13) All shares are obtainable upon the exercise of warrants, which are 
     immediately exercisable.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

MANAGEMENT AGREEMENT

     Pursuant to the terms of the ten-year Management Agreement (the "Management
Agreement") entered into between Lehman and the Company, (i) upon consummation
of the Recapitalization, the Company paid Lehman certain transaction fees and
(ii) the Company agreed to pay Lehman an annual 

                                      31
<PAGE>

management fee equal to $500,000, as may be adjusted from time to time 
subject to necessary board approval, that commenced accruing on October 1, 
1998 and which was to be payable on a quarterly basis in arrears commencing 
on January 1, 1999. During 1998, the Board of Directors approved an amendment 
to the Management Agreement and the Company concurrently entered into a 
Management Services Agreement with Lehman, the combined effect of which was 
to further delineate the management services to be provided by Lehman and to 
provide that Lehman's management fee would be paid in advance on a quarterly 
basis commencing October 1, 1998.

SHAREHOLDERS AGREEMENT

     In connection with the Recapitalization, the Company, JFLEI, the 
Continuing Shareholders (as defined in the Shareholders Agreement) and, in 
their capacity as holders of the Warrants (as defined in the Shareholders 
Agreement), Jackson National Life Insurance Company ("Jackson National"), 
Paribas North America, Inc. ("Paribas"), MassMutual Corporate Value Partners 
Limited, Massachusetts Mutual Life Insurance Company, MassMutual High Yield 
Partners LLC (collectively, "MassMutual") (collectively, the "Shareholders") 
entered into a Shareholders Agreement (the "Shareholders Agreement"), the 
principal terms of which are summarized below:

     CERTAIN VOTING RIGHTS OF HOLDERS OF REDEEMABLE PREFERRED STOCK. If at 
any time after October 15, 2000, any amount of cash dividends payable on the 
Series A and Series B 11 1/2% Cumulative Redeemable Stock (collectively, the 
"Redeemable Preferred Stock"), which was issued on the closing date of the 
Recapitalization, shall have been in arrears and unpaid for four or more 
successive Dividend Payment Dates, then the number of directors constituting 
the Board of Directors shall, without further action, be increased by the 
Dividend Arrears Number (as defined below) and, in addition to any other 
rights to elect directors which the holders of Redeemable Preferred Stock may 
have, the holders of all outstanding shares of Redeemable Preferred Stock, 
voting separately as a class and to the exclusion of the holders of all other 
classes and series of stock of the Company, shall be entitled to elect the 
directors of the Company to fill such newly created directorships.

     If the Company shall fail to redeem shares of Redeemable Preferred Stock 
in accordance with the mandatory redemption provisions described above, then 
the number of directors constituting the Board of Directors shall, without 
further action, be increased by the Control Number (as defined below) and, in 
addition to any other rights to elect directors which the holders of 
Redeemable Preferred Stock may have, the holders of all outstanding shares of 
Redeemable Preferred Stock, voting separately as a class and to the exclusion 
of the holders of all other classes and series of stock of the Company, shall 
be entitled to elect the directors of the Company to fill such newly created 
directorships.

     "Dividend Arrears Number" shall mean such number of additional directors 
of the Company which, when added to the number of directors otherwise 
nominated by the holders of Redeemable Preferred Stock, shall result in the 
number of directors elected by or at the direction of the holders of 
Redeemable Preferred Stock constituting one-third of the members of the Board 
of Directors of the Company.

     "Control Number" shall mean such number of additional directors of the 
Company which, when added to the number of directors otherwise nominated and 
elected by the holders of Redeemable Preferred Stock, shall result in the 
number of directors nominated and elected by or at the direction of the 
holders of Redeemable Preferred Stock constituting a majority of the members 
of the Board of Directors of the Company.


                                      32


<PAGE>

     Any additional directors elected by the Redeemable Preferred Stock 
pursuant to the provisions described above shall remain in office until such 
time as (i) all such dividends in arrears are paid in full or (ii) all shares 
of Redeemable Preferred Stock shall have been redeemed pursuant to the 
mandatory redemption provisions described above, as the case may be.

     RESTRICTIONS ON TRANSFER. The shares of the Company's Common Stock held 
by each of the parties to the Shareholders Agreement, and certain of their 
transferees, are subject to restrictions on transfer. The shares of Common 
Stock may be transferred only to certain related transferees, including, (i) 
in the case of individual Shareholders, family members or their legal 
representatives or guardians, heirs and legatees and trusts, partnerships and 
corporations the sole beneficiaries, partners or shareholders, as the case 
may be, of which are family members, (ii) in the case of partnership 
Shareholders, the partners of such partnership, (iii) in the case of 
corporate Shareholders, affiliates of such corporation and (iv) transferees 
of shares sold in transactions complying with the applicable provisions of 
the Shareholder or Company Right of First Refusal or the Tag-along or 
Drag-Along Rights (as each term is defined below.)

     RIGHTS OF FIRST OFFER. If any Shareholder desires to transfer any shares 
of the Company's Common Stock or Warrants (other than pursuant to certain 
permitted transfers) and if such Shareholder has not received a bona fide 
offer from an unrelated third-party that such shareholder wishes to accept (a 
"Third-Party Offer"), all other Shareholders have a right of first offer (the 
"Right of First Offer") to purchase the shares or warrants (the "Subject 
Shares") upon such terms and subject to such conditions as are set forth in a 
notice (a "First Offer Notice") sent by the selling Shareholder to such other 
Shareholders. If the Shareholders elect to exercise their Rights of First 
Offer with respect to less than all of the Subject Shares, the Company has a 
right to purchase all of the Subject Shares that the Shareholders have not 
elected to purchase. If the Shareholders receiving the First Offer Notice and 
the Company will exercise their respective rights of first offer with respect 
to less than all of the Subject Shares, the selling Shareholder may solicit 
Third-Party Offers to purchase all (but not less than all) of the Subject 
Shares upon such terms and subject to such conditions as are, in the 
aggregate, no less favorable to the selling Shareholder than those set forth 
in the First Offer Notice.

     SUBSCRIPTION OFFER WITH RESPECT TO PRIMARY ISSUANCES. The Company will 
not be permitted to issue equity securities, or securities convertible into 
equity securities to JFLEI or to any of its affiliates unless the Company has 
offered to issue to each of the other Shareholders, on a pro rata basis, an 
opportunity to purchase such securities on the same terms, including price, 
and subject to the same conditions as those applicable to JFLEI and/or its 
affiliate.

     TAG-ALONG RIGHTS. The Shareholders Agreement provides that, if the 
Shareholders and the Company fail to exercise their respective rights of 
first refusal with respect to all of the Subject Shares, the Shareholders 
have the right to "tag along" (the "Tag-Along Right") upon the sale of the 
Company's Common Stock by JFLEI pursuant to a Third-Party Offer.

     DRAG-ALONG RIGHTS. The Shareholders Agreement provides that if one or 
more Shareholders holding a majority of the Company's Common Stock (the 
"Majority Shareholders") propose to sell all of the Common Stock owned by the 
Majority Shareholders, the Majority Shareholders have the right (the 
"Drag-Along Right") to compel the other Shareholders to sell all of the 
shares of Common Stock held by such other Shareholders upon the same terms 
and subject to the same conditions as the terms and conditions applicable to 
the sale by the Majority Shareholders.

                                      33

<PAGE>

     MERGER. The Shareholders Agreement provides that the Company may not 
enter into any merger, consolidation or similar business combination unless 
the terms of such merger provide for all Shareholders to receive the same 
consideration for their shares of Common Stock.

     REGISTERED OFFERINGS. The shares of Common Stock may be transferred in a 
bona fide public offering for cash pursuant to an effective registration 
statement (a "Registered Offering") without compliance with the provisions of 
the Shareholders Agreement related to the Right of First Refusal or the 
Tag-Along or Drag-Along Rights.

     LEGENDS. The shares of Common Stock subject to the Shareholders 
Agreement bear a legend related to the Right of First Refusal and the 
Tag-Along and Drag-Along Rights, which legends will be removed when the 
shares of Common Stock are, pursuant to the terms of the Shareholders 
Agreement, no longer subject to the restrictions on transfer imposed by the 
Shareholders Agreement.

     REGISTRATION RIGHTS. JFLEI and certain other shareholders are entitled 
to one "demand" and unlimited piggyback registration rights, subject to 
additional customary rights and limitations.

     The term of the Shareholders Agreement is the earlier of (i) August 20, 
2007, (ii) the date on which none of the Shareholders nor any of their 
permitted transferees are subject to the terms of the Shareholders Agreement, 
(iii) the date on which none of the shares of Common Stock are subject to the 
restrictions on transfer imposed by the Shareholders Agreement or (iv) the 
consummation of a Registered Offering for an aggregate offering price of 
$25.0 million or more.

INDEMNIFICATION OF OFFICERS AND DIRECTORS

     The Articles of Incorporation of the Company contain provisions 
eliminating the personal liability of directors for monetary damages for 
breaches of their duty of care, except in certain prescribed circumstances. 
The Bylaws of the Company also provide that directors and officers will be 
indemnified to the fullest extent authorized by California law, as it now 
stands or may in the future be amended, against all expenses and liabilities 
reasonably incurred in connection with service for or on behalf of the 
Company. The Bylaws of the Company provide that the rights of directors and 
officers to indemnification is not exclusive of any other right now possessed 
or hereinafter acquired under any statute, agreement or otherwise.

                                     PART IV

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

(a)(1)   Consolidated Financial Statements:

     The following consolidated financial statements of the Company are 
included in response to Item 8 of this report.

<TABLE>
<CAPTION>
                                                                                            PAGE REFERENCE
                                                                                               FORM 10-K
                                                                                            --------------
<S>                                                                                         <C>
Report of Ernst & Young LLP, Independent Auditors...........................................    F-2
Consolidated Statements of Operations for the three fiscal years ended January 1, 1999......    F-3
Consolidated Balance Sheets at January 2, 1998 and January 1, 1999..........................    F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the three fiscal years ended 
</TABLE>

                                      34

<PAGE>

<TABLE>
<S>                                                                                         <C>
     January 1, 1999........................................................................    F-5
Consolidated Statements of Cash Flows for the three years ended January 1, 1999.............    F-6
Notes to Consolidated Financial Statements..................................................    F-7
</TABLE>

(a)(2) Consolidated Financial Statement Schedules:

<TABLE>
<S>                                                                                         <C>
Report of Ernst & Young LLP, Independent Auditors...........................................    S-2
Schedule II--Valuation and Qualifying Accounts..............................................    S-3
</TABLE>

     Schedules other than those listed above have been omitted since they are
either not required, not applicable or the information is otherwise included.

(b) Reports on Form 8-K.

     None.

(c) Exhibits

1.1   Purchase Agreement, dated April 17, 1998 between the Company and the
        Initial Purchaser.(1)

2.1   Stock Purchase Agreement, dated as of March 5, 1998 among Burke, Sovereign
        and Mercer.(2)

3.1   Articles of Incorporation of the Company.(3)

3.2   Bylaws of the Company.(3)

3.3   Articles of Incorporation of Burke Flooring Products, Inc.(3)

3.4   Bylaws of Burke Flooring Products, Inc.(3)

3.5   Articles of Incorporation of Burke Rubber Company, Inc.(3)

3.6   Bylaws of Burke Rubber Company, Inc.(3)

3.7   Articles of Incorporation of Burke Custom Processing, Inc.(3)

3.8   Bylaws of Burke Custom Processing, Inc.(3)

3.9   Articles of Incorporation of Mercer Products Company, Inc.(1)

3.10  Bylaws of Mercer Products Company, Inc.(1)

4.1   Indenture among the Company, the Subsidiary Guarantors and United States
        Trust Company of New York, relating to the Floating-Rate Notes, dated as
        of April 21, 1998.(1)

4.2   First Supplemental Indenture, dated April 21, 1998, between the Company,
        the Subsidiary Guarantors and United States Trust Company of 
        New York.(1)

4.3   Form of Note (included in Exhibit 4.1).(1)

4.4   Registration Rights Agreement, dated April 21, 1998, between the Company
        and the Holders.(1)

10.1  Purchase Agreement, dated August 14, 1997, between the Company and the
        Initial Purchaser.(3)

10.2  Agreement and Plan of Merger, dated as of August 13, 1997, by and among 
        the Company, the Company Shareholders, JFLEI and MergerCo.(3)

                                      35

<PAGE>

10.3  Indenture among the Company, the Subsidiary Guarantors and United States
        Trust Company of New York, relating to the Fixed Rate Notes, dated as of
        August 20, 1997.(3)

10.4  Registration Rights Agreement, dated August 20, 1997, between the Company
        and the Fixed Rate Note Holders.(3)

10.5  Loan and Security Agreement, dated as of August 20, 1997, between the
        Company, the Lenders and NationsBank, N.A.(3)

10.6  Amendment No. 1, Waiver Joinder Agreement to Loan Security Agreement, 
        dated April 21, 1998, between the Company, Mercer and NationsBank, N.A. 
        (1)

10.7  Form of Revolving Notes (included in Exhibit 10.6). (1)

10.8  Subsidiary Guaranty, dated August 20, 1997, between the Company and the
        Subsidiaries.(3)

10.9  Subsidiary Security Agreement, dated as of August 20, 1997, between the
        Company and the Subsidiaries.(3)

10.10 Assignment for Security, dated April 21, 1998, by Mercer.(1)

10.11 First Amendment to Deed of Trust with Absolute Assignment of Leases and
        Rents, Security Agreement and Fixture Filing, dated April 21, 1998, 
        between the Company and NationsBank, N.A.(1)

10.12 Florida Mortgage, Security Agreement and Assignment of Leases and Rents,
        dated April 21, 1998, between Mercer and NationsBank, N.A. 
        (unrecorded)(1)

10.13 Stock Pledge Agreement, dated August 20, 1997.(3)

10.14 Pledge Agreement, dated April 21, 1998, between the Company and
        NationsBank, N.A.(1)

10.15 Consent Solicitation Statement dated March 30, 1998.(1)

10.16 Form of Consent to Amendments to Indenture.(1)

10.17 Investment Agreement, dated as of August 20, 1997, between the Company and
        preferred shareholders.(3)

10.18 Shareholders' Agreement, dated as of August 20, 1997, between the Company
        and the shareholders.(3)

10.19 Shareholders' Registration Rights Agreement, dated as of August 20, 1997,
        between the Company and the shareholders.(3)

10.20 Warrantholders' Registration Rights Agreement dated as of August 20, 1997,
        between the Company and the warrantholders.(3)

10.21 Form of Warrant Certificate.(3)

10.22 Form of Election Form for Series C Preferred Stock.(1)

10.23 Management Agreement, dated August 20, 1997, between the Company and J.F.
        Lehman & Company.(3)

10.24 Lease Agreement, dated April 30, 1997, between the Company and Senter
        Properties, LLC for the premises at 2049 Senter Road, San Jose, CA.(3)

10.25 Lease Agreement, dated May 1, 1996, between the Company and SSMRT
        Bensonville Industrial Park (3), Inc. for the premises at 870 Thomas 
        Drive, Bensonville, Illinois.(3)

                                      36

<PAGE>

10.26 Lease Agreement, dated October 20, 1995, between the Company and Lincoln
        Property Company for the premises at 13767 Freeway Drive, Santa Fe 
        Springs, CA.(3)

10.27 Lease Agreement, dated April 25, 1983, between the Company and Donald M.
        Hypes for the premises at 14910 Carmenita Boulevard, Norwalk, CA.(3)

10.28 Lease Agreement, dated March 29, 1996, between S & M Development Co., a
        general partnership, for the premises at 13615 Excelsior Drive, Santa Fe
        Springs, CA.(3)

10.29 Lease Agreement, dated June 5, 1995, between the Company and Stephen S.
        Gray, the duly appointed Chapter 7 trustee of the Estate of Haskon
        Corporation, for the premises at 336 Weir Street, Taunton, MA.(3)

10.30 Consent to sale of all of the outstanding shares of Mercer Products
        Company, Inc. to Burke Industries, Inc., dated March 20, 1998 by Land 
        Co. Leasing & New Development Co. and related Standard/Industrial 
        Commercial Single-Tenant Lease-Gross, dated June 22, 1994, as amended, 
        between The Childs Family Trust u/t/a of April 30, 1981 and The A.G. 
        Gardner Trust u/t/a of March 5, 1981 dba Landco and Mercer.(1)

10.31 Consent of Lessor dated April 21, 1998 and related Agreement of Lease
        dated December 1, 1998, as amended, between RTC Properties, Inc. and
        Mercer.(1)

10.32 Sublease Agreement, dated February 20, 1992, between Burke Rubber Company
        for the premises at 107 South Riverside Drive, Modesto, CA.(3)

10.33 Servicing Agreement, dated April 26, 1996, between the Company and
        Westland Technologies.(3)

10.34 Amendment No. 1 to the Stock Purchase Agreement, dated April 21, 1998,
        among Burke, Sovereign and Mercer.

10.35 Lease Agreement, dated April 15, 1998, between Robert Steele, et al and
        the Company, for the premises at 10039 Norwalk Boulevard, Santa Fe 
        Springs, CA.

10.36 Management Services Agreement, dated as of June 18, 1998, between the
        Company and J.F. Lehman & Company.

10.37 Amendment No. 1 to Management Agreement between the Company and J.F.
        Lehman & Company, dated as of June 18, 1998.

10.38 Burke Industries, Inc. Deferred Compensation Agreement.

10.39 Burke Industries, Inc. 1997 Stock Option Plan.

12.1  Computation of Ratios of Earnings to Fixed Charges and Combined Fixed
        Charges and Preferred Stock Dividends.

21.1  Subsidiaries of the Company.

27.   Financial Data Schedule.

------------------------
(1)  Incorporated by reference to the registrant's Registration Statement on
     Form S-4, File No. 333-36675, as filed with the Securities and Exchange
     Commission on June 19, 1998.

(2)  Incorporated by reference to the Company's 1997 annual report on Form 10-K,
     File No. 333-36675, as filed with the Securities and Exchange Commission on
     April 2, 1998.

(3)  Incorporated by reference to the registrant's Registration Statement on
     Form S-4, File No. 333-36675, as filed with the Securities and Exchange
     Commission on September 29, 1997, as amended.

                                      37

<PAGE>

     SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
     SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
     SECURITIES PURSUANT TO SECTION 12 OF THE ACT.

     No annual report or proxy material covering the Company's last fiscal year
has been or will be sent to security holders of the Company.

                                     38
<PAGE>




                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>

                                                                                                                PAGE
                                                                                                                ----
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
<S>                                                                                                             <C>
Report of Ernst & Young LLP, Independent Auditors...............................................................F-2

Consolidated Statements of Operations for the three fiscal years ended January 1, 1999..........................F-3

Consolidated Balance Sheets at January 2, 1998 and January 1, 1999..............................................F-4

Consolidated Statements of Shareholders' Equity (Deficit) for the three fiscal years ended January 1, 1999......F-5

Consolidated Statements of Cash Flows for the three fiscal years ended January 1, 1999..........................F-6

Notes to Consolidated Financial Statements......................................................................F-9


</TABLE>
                                     F-1
<PAGE>



                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Burke Industries, Inc. and Subsidiaries

     We have audited the accompanying consolidated balance sheets of Burke
Industries, Inc. and subsidiaries as of January 1, 1999 and January 2, 1998, and
the related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for each of the three fiscal years in the period ended
January 1, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Burke
Industries, Inc. and subsidiaries at January 1, 1999 and January 2, 1998, and
the consolidated results of their operations and their cash flows for each of
the three fiscal years in the period ended January 1, 1999, in conformity with
generally accepted accounting principles.

                                                       /s/   ERNST & YOUNG LLP

San Jose, California
February 26, 1999, except paragraph 12 of Note 5, as to which the date is 
March 16, 1999


<PAGE>


                     BURKE INDUSTRIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                                                FISCAL YEARS ENDED
                                                                   -------------------------------------------
                                                                      1998             1997              1996
                                                                   --------          --------          -------
                                                                                  (IN THOUSANDS)
<S>                                                                <C>                <C>              <C>
Net sales..............................................            $107,019           $90,228          $72,466
Costs and expenses:
   Cost of sales.......................................              77,053            62,917           49,689
   Selling, general and administrative.................              14,546            12,174           11,569
   Amortization of goodwill............................               1,411                64               41
   Transaction expenses................................                  --             1,321               --
   Stock option purchase...............................                  --            14,105               --
                                                                    -------           -------          -------
Income (loss) from operations..........................              14,009              (353)          11,167
Interest expense, net..................................              13,819             5,408            2,668
                                                                    -------           -------          -------
Income (loss) before income tax provision (benefit)

   and discontinued operation..........................                 190            (5,761)           8,499
Income tax provision (benefit).........................                 160            (1,818)           3,466
                                                                    -------           -------          -------
Income (loss) from continuing operations before

   discontinued operation..............................                  30            (3,943)           5,033
Loss from discontinued operation, net of income tax
   benefit of $205.....................................                  --                --             (308)
Loss on disposal of discontinued operation, net of
income tax benefit of $356.............................                  --                --             (624)

                                                                    -------           -------          -------
Net income (loss)......................................                 $30           $(3,943)          $4,101
                                                                    -------           -------          -------
                                                                    -------           -------          -------
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.



                                     F-3

<PAGE>




                     BURKE INDUSTRIES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                         FISCAL YEARS ENDED
                                                                                       ----------------------
                                                                                       1998              1997
                                                                                       ----              ----
                                                                                           (IN THOUSANDS)
<S>                                                                                 <C>              <C>
                                                      ASSETS
Current assets:
   Cash and cash equivalents.............................................           $   2,981        $  11,563
   Restricted cash.......................................................                  --            1,070
   Trade accounts receivable, less allowance of $812 in 1998 and $334 in               
     1997................................................................              13,109           11,186
   Inventories...........................................................              14,574           11,187
   Prepaid expenses and other current assets.............................               1,731            1,056
   Deferred income tax assets............................................               3,108            2,845
   Refundable income taxes...............................................                 174            1,639
                                                                                    ---------        ---------
       Total current assets..............................................              35,677           40,546
Property, plant, and equipment:
   Land and improvements.................................................               2,107            1,884
   Buildings and improvements............................................              11,210            9,151
   Equipment.............................................................              17,277           13,007
   Leasehold improvements................................................                 721              606
                                                                                    ---------        ---------
                                                                                       31,315           24,648
   Less: accumulated depreciation and amortization.......................              12,300           10,536
                                                                                    ---------        ---------
                                                                                       19,015           14,112
   Construction-in-process...............................................               2,364              908
                                                                                    ---------        ---------
                                                                                       21,379           15,020
Other assets:
   Prepaid pension cost..................................................                 498              501
   Goodwill, net.........................................................              29,735            1,465
   Deferred financing costs, net.........................................               6,542            5,210
   Other assets..........................................................                 114               95
                                                                                    ---------        ---------
                                                                                       36,889            7,271
                                                                                    ---------        ---------
       Total assets......................................................             $93,945          $62,837
                                                                                    ---------        ---------
                                                                                    ---------        ---------

                                  LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

Current liabilities:
   Trade accounts payable and accrued expenses...........................              $6,934           $5,489
   Accrued compensation and related liabilities..........................               2,715            2,086
   Accrued interest......................................................               5,434            4,347
   Payable to shareholders...............................................                 953            5,882
   Income taxes payable..................................................                 695            1,064
                                                                                    ---------        ---------
       Total current liabilities.........................................              16,731           18,868
Senior notes.............................................................             110,000          110,000
Floating rate notes......................................................              30,000               --
Other noncurrent liabilities.............................................                 444              420
Deferred income tax liabilities..........................................               4,082            3,891
Preferred stock, no par value; 50,000 shares authorized; 30,000 Series A
   Redeemable shares designated; 16,000 Series A shares issued and 
   outstanding; 5,000 Series B Redeemable shares designated; 2,000
   Series B shares issued and outstanding (aggregate liquidation and 
   redemption preference $18,000)........................................              18,160           16,148
Shareholders' equity (deficit):
   Convertible preferred stock, no par value: 3,000 Series C shares
   designated, issued and outstanding (liquidation preference $3,000)....               3,000               --
   Class A common stock, no par value:
     Authorized shares--20,000,000
     Issued and outstanding shares--3,857,000 in 1998 and 1997...........              25,464           25,464
   Accumulated deficit...................................................            (113,936)        (111,954)
                                                                                    ---------        ---------
       Total shareholders' equity (deficit)..............................             (85,472)         (86,490)
                                                                                    ---------        ---------
Total liabilities and shareholders' equity (deficit).....................             $93,945          $62,837
                                                                                    ---------        ---------
                                                                                    ---------        ---------
</TABLE>

         The accompanying Notes to Consolidated Financial Statements
               are an integral part of these statements.

                                     F-4
<PAGE>




                     BURKE INDUSTRIES, INC. AND SUBSIDIARIES

            CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                          CONVERTIBLE PREFERRED
                                                STOCK              CLASS A COMMON STOCK                   
                                          ---------------------    --------------------                     TOTAL
                                                                                          ACCUMULATED   SHAREHOLDERS'
                                             SHARES     AMOUNT       SHARES     AMOUNT       DEFICIT    EQUITY (DEFICIT)
                                          ----------   --------    ---------   --------   -----------   ----------------
                                                                      (IN THOUSANDS)
<S>                                          <C>       <C>          <C>      <C>          <C>             <C>
Balance at fiscal year end 1995.......         --        --         9,431     $5,633        $(5,293)          $340
   Net income.........................         --        --            --         --          4,101          4,101
   Proceeds from sales of shares
   through employee stock plans.......         --        --           181         77           --               77
   Increase in value of shareholder
       warrants.......................         --        --            --      1,241         (1,241)            --
   Repurchase of stock................         --        --          (235)      (235)          --             (235)
                                          ----------   --------    ------    -------       --------       --------
Balance at fiscal year end 1996.......         --        --         9,377      6,716         (2,433)         4,283
   Net loss...........................         --        --            --         --         (3,943)        (3,943)
   Proceeds from sales of shares
       through employee stock plans...         --        --            22         10             --             10
   Increase in value of shareholder
       warrants.......................         --        --            --      5,100         (5,100)            --
   Accretion of preferred stock
       discount.......................         --        --            --         --            (89)           (89)
   Preferred stock dividend in kind...         --        --            --         --           (665)          (665)
   Common stock warrant issued on
       sale of preferred stock........         --        --            --         --          2,500          2,500
   Proceeds from sale of common
       stock, net of issuance costs...         --        --         3,134     18,724             --         18,724
   Recapitalization of company........         --        --        (8,676)    (5,086)      (102,224)      (107,310)
                                          ----------   --------    ------    -------       --------       --------
Balance at fiscal year end 1997.......         --        --         3,857     25,464       (111,954)       (86,490)
   Net income.........................         --        --            --         --             30             30
   Proceeds from sale of preferred
       stock..........................      3,000     3,000            --         --             --          3,000
   Accretion of preferred stock
       discount.......................         --        --            --         --           (242)          (242)
   Preferred stock dividend in kind...         --        --            --         --         (1,770)        (1,770)
                                          ----------   --------    ------    -------       --------       --------
Balance at fiscal year end 1998.......      3,000    $3,000         3,857    $25,464      $(113,936)      $(85,472)
                                          ----------   --------    ------    -------       --------       --------
                                          ----------   --------    ------    -------       --------       --------
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.


<PAGE>

                     BURKE INDUSTRIES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                FISCAL YEARS ENDED
                                                                    ------------------------------------------
                                                                     1998              1997              1996
                                                                    -------          --------           ------
                                                                                  (IN THOUSANDS)
<S>                                                                  <C>             <C>                <C>  
OPERATING ACTIVITIES
Net income (loss)...........................................            $30           $(3,943)          $4,101
Adjustments to reconcile net income (loss) to net cash
   provided by (used in) operating activities:
   Depreciation and amortization:
     Property, plant, and equipment.........................          1,764             1,435            1,378
     Goodwill...............................................          1,411                64               41
     Debt discounts arising from warrants...................             --                93               37
     Interest on shareholder note...........................             --              (240)              --
     Deferred financing costs...............................            752               229               --
   Loss on disposal of discontinued operation...............             --                --              624
   Changes in net assets of discontinued operation..........             --                --            1,401
   Changes in operating assets and liabilities:
     Trade accounts receivable..............................            408            (2,031)             701
     Inventories............................................           (506)           (2,571)          (1,398)
     Prepaid expenses and other current assets..............           (619)             (436)             (78)
     Refundable income taxes................................          1,465                --               --
     Prepaid pension cost...................................              3                41               83
     Other assets...........................................            (52)               25               12
     Trade accounts payable and accrued expenses............          1,559             3,382            1,940
     Accrued compensation and related liabilities...........            223               149              124
     Deferred income taxes..................................            (72)           (1,397)             241
     Income taxes payable...................................           (369)           (3,043)            (103)
     Other noncurrent liabilities...........................             24              (300)              36
                                                                    -------          --------          -------
Net cash provided by (used in) operating activities.........          6,021            (8,543)           9,140
INVESTING ACTIVITIES
Acquisition of Mercer Products Company; net of cash 
  acquired..................................................        (38,440)               --               --
Purchases of property, plant, and equipment.................         (3,220)           (1,454)          (1,684)
Proceeds from disposal of discontinued operation............             --                --            1,818
Note receivable from affiliate of the principal 
  shareholders..............................................             --                --           (4,066)
Repayment of note receivable from affiliate of the principal
   shareholders.............................................             --             4,306               --
                                                                    -------          --------          -------
Net cash (used in) provided by investing activities.........        (41,660)            2,852           (3,932)
FINANCING ACTIVITIES
Restricted cash.............................................          1,070            (1,070)              --
Checks outstanding in excess of funds deposited.............             --              (828)            (888)
Borrowings of long-term debt................................             --                --           79,516
Repayments and settlement of long-term debt and capital lease
   obligations..............................................             --           (18,869)         (83,678)
Payable to shareholders.....................................         (4,929)            5,882               --
Repurchase of common stock and warrants.....................             --                --             (235)
Proceeds from sales of shares through employee stock plans..             --                10               77
Deferred financing costs....................................         (2,084)           (5,430)              --
Repayment of subordinated debt..............................             --            (1,750)              --
Net recapitalization consideration..........................             --          (107,310)              --
Issuance of notes payable...................................         30,000           110,000               --
Issuance of preferred stock, net of issuance costs..........          3,000            17,895               --
Issuance of common stock, net of issuance costs.............             --            18,724               --
                                                                    -------          --------          -------
Net cash provided by (used in) financing activities.........         27,057            17,254           (5,208)
                                                                    -------          --------          -------
Change in cash..............................................         (8,582)           11,563               --
Cash at beginning of year...................................         11,563                --               --
                                                                    -------          --------          -------
Cash at end of year.........................................         $2,981           $11,563          $    --
                                                                    -------          --------          -------
                                                                    -------          --------          -------
</TABLE>

         The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.

                                     F-6
<PAGE>

                     BURKE INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

     ORGANIZATION

     Burke Industries, Inc. and subsidiaries (the Company) develop, manufacture,
and market various elastomer products for use in commercial and military
applications. The Company sells its products through a network of distributors
or directly to customers in the construction, defense, and aerospace industries
and other commercial markets, primarily in North America. The Company performs
ongoing credit evaluations of its customers' financial condition and generally
does not require collateral.

     One customer accounted for approximately 10% of net sales in fiscal year
1998, 13% of net sales in fiscal year 1997 and 11% of net sales in fiscal year
1996. No other customers constituted 10% or more of net sales in any of the
three fiscal years ended in 1998.

     Substantially all of the Company's hourly workers in San Jose, California
are represented by the International Association of Machinists and Aerospace
Workers through a collective bargaining agreement that expires October 2, 2000.

     The Company has renewed its collective bargaining agreement with United
Electrical Radio and Machine Workers of America, who represent the Company's
hourly workers in Taunton, Massachusetts through June 5, 2000.

     Burke's employees at the Eustis, Florida location are represented by the
Glass, Molders, Pottery, Plastics and Allied Workers International Union. This
collective bargaining agreement was renegotiated in December 1998 for a three
year term.

     RECAPITALIZATION

     In August 1997, the Company entered into an Agreement and Plan of Merger
(the Merger Agreement) pursuant to which the Company was recapitalized (the
Recapitalization). Pursuant to the Merger Agreement, all shares of the Company's
common stock, other than those retained by certain members of management and
certain other shareholders (Continuing Shareholders), were converted into the
right to receive cash based upon a formula. The Continuing Shareholders agreed
to retain approximately 15% of the common equity of the Company. In order to
finance the transactions contemplated by the Recapitalization, the Company (i)
issued $110 million of senior notes in a debt offering (Note 5); (ii) received
$20 million in cash from an investor group for common stock, and (iii) received
$18 million in cash for the issuance of redeemable preferred stock (the
Transactions). Pursuant to the terms of a ten-year Management Agreement entered
into between the Company and its principal shareholder after completion of the
Recapitalization transaction, the Company paid the shareholder a transaction fee
of $1.0 million and the Company agreed to pay an annual management fee equal to
$500,000 commencing October 1, 1997.

     The Company has four wholly owned subsidiaries, consisting of Burke
Flooring Products, Inc., Burke Rubber Company, Inc., Burke Custom Processing,
Inc., (the Guarantor Subsidiaries) and Burkeline Construction Company, Inc. (the
Non-Guarantor Subsidiary). Each of the Guarantor Subsidiaries' guarantees of the
Company's $110 million senior notes and $30 million floating-rate notes,

                                     F-7

<PAGE>

                     BURKE INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


is full, unconditional and joint and several. The Company's subsidiaries have 
no operations or assets and liabilities and therefore no separate financial 
statements of the Company's subsidiaries are presented.

     In connection with the above August 1997 transactions, the tax benefit the
Company will receive associated with the cost to purchase options issued and
outstanding under the Company's stock option plan, in addition to other tax
savings associated with the transaction, will be distributed to the Company's
continuing and former shareholders when realized by the Company. Accordingly, as
part of the recapitalization the Company recognized a liability of $5,882,000
for the total estimated benefit to be realized of which $953,000 remains at
fiscal year end 1998.

     A lawsuit was filed by a former shareholder against the Company and certain
of its current and former officers and directors. The former shareholder is
asserting various claims in connection with the Company's repurchase of the
former shareholders' shares prior to the Recapitalization. The Company believes
that such claims are without merit and intends to vigorously defend such claims.
Management believes the resolution of this matter will not have a material
adverse effect on the financial position of the Company.

     The Company is subject to various federal, state and local environmental
laws and regulations. The former shareholders of the Company have agreed,
subject to certain limitations, to indemnify the Company against certain
environmental liabilities incurred prior to the Recapitalization. In addition,
the former shareholders of Mercer Products Company, Inc. (Note 2) have agreed,
subject to certain limitations, to indemnify the Company against environmental
liabilities incurred prior to the acquisition of Mercer Products Company, Inc.
Based upon environmental reviews and the indemnification provisions discussed
above, management believes the potential obligations relating to environmental
matters will not have a material adverse effect on the financial position of the
Company.

     ACCOUNTING PERIODS

     The Company's fiscal year ends on the Friday closest to December 31. The
Company maintains a fifty-two/fifty-three week fiscal year cycle, which resulted
in a fifty-three week year in fiscal 1996, a fifty-two week year in fiscal 1997
and a fifty-two week year in fiscal 1998. For convenience, the accompanying
financial statements have been referred to as fiscal years ended 1996, 1997, and
1998 for the periods ended January 3, 1997, January 2, 1998 and January 1, 1999,
respectively.

     CONSOLIDATION

     The accompanying consolidated financial statements include the accounts of
Burke Industries, Inc. and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.

     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 reported
period. Actual results could differ from those estimates.

                                     F-8
<PAGE>

                     BURKE INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     CASH AND CASH EQUIVALENTS

     Cash and cash equivalents consist of bank demand deposit accounts. At
fiscal year end 1997, restricted cash consisted of a three month U.S. treasury
bill held as security for an outstanding letter of credit.

     REVENUE RECOGNITION

     Revenue from sales of products is generally recognized upon shipment to
customers. For contracts relating to certain products, a portion of the revenue
is recognized upon completion of a part of the manufacturing process and upon
customer acceptance. The remaining revenue is recognized upon completion of the
manufacturing process and shipment.

     WARRANTY

     The Company generally warrants its roofing products for two years, for
which the related costs are not significant. In addition, the Company sells
extended warranties for ten to thirty years. Revenues received for extended
warranties are deferred and amortized over the period in which warranty costs
are expected to be incurred. Warranty reserves and deferred warranty revenues
are included in accrued expenses and other noncurrent liabilities on the
accompanying consolidated balance sheets.

     INVENTORIES

     Inventories are stated at the lower of cost (first-in, first-out method) or
market.

     PROPERTY, PLANT, AND EQUIPMENT

     Property, plant, and equipment are stated at cost. Depreciation is computed
over the estimated useful lives (three to forty years) of the assets using the
straight-line method. Leasehold improvements are amortized by the straight-line
method over the shorter of the estimated useful life of the asset or the term of
the related lease. Amortization of assets under capital leases is included in
depreciation expense.

     FINANCIAL INSTRUMENTS

     The carrying value of accounts receivable and payable and accrued
liabilities approximates fair value due to the short-term maturities of these
assets and liabilities.

     COMPREHENSIVE INCOME

     In June 1997, the Financial Accounting Standards Board (FASB) released
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (FAS 130). FAS 130 establishes standards for the reporting and display
of comprehensive income and its components in a full set of general purpose
financial statements and is effective for fiscal years beginning after December
15, 1997. The adoption of FAS 130 had no impact on the Company's results of
operations or financial position.

                                     F-9
<PAGE>

                     BURKE INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     SEGMENT INFORMATION

     Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION (Statement
131). Statement 131 superseded FASB Statement No. 14, FINANCIAL REPORTING FOR
SEGMENTS OF A BUSINESS ENTERPRISE. Statement 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports.
Statement 131 also establishes standards for related disclosures about products
and services, geographic areas, and major customers. The adoption of Statement
131 did not affect results of operations or financial position, but did affect
the disclosure of segment information.

2.   ACQUISITION OF MERCER PRODUCTS COMPANY, INC.

     On April 21, 1998, the Company acquired all of the issued and outstanding
capital stock of Mercer Products Company, Inc. ("Mercer"), from Sovereign
Specialty Chemicals, Inc., for an aggregate purchase price of $38,474,000
(including acquisition costs of $2,280,000). The acquisition was accounted for
under the purchase method of accounting. The Company's consolidated results of
operations include Mercer's results from the date of acquisition.

     The total purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values as follows:

<TABLE>
<CAPTION>
                                                                                    (IN THOUSANDS)
                <S>                                                                 <C>
                Current assets...............................................         $ 5,269
                Plant and equipment..........................................           4,903
                Excess of purchase price over net assets acquired............          29,681
                Amounts payable and accrued expenses.........................          (1,379)
                                                                                      -------
                Total purchase price.........................................         $38,474
                                                                                      -------
                                                                                      -------
</TABLE>

     The above purchase price allocation is tentative and subject to change,
although such changes are not anticipated to be significant.

     Financing for the Mercer Acquisition and related expenses was provided, in
large part, from the sale of $30 million principal amount of Floating Interest
Rate Senior Notes Due 2007 (the "Floating-Rate Notes"). The balance of the
financing was provided with $3.0 million from the sale of 3,000 shares of the
Company's 6% Series C Convertible Preferred Stock and cash on hand.

     The following pro forma data was prepared to illustrate the estimated
effect of the Mercer acquisition and the financing related thereto, as if the
Mercer acquisition had occurred as of the beginning of each period presented:

<TABLE>
<CAPTION>
                Fiscal Year Ended                                      1998               1997
                                                                       ----               ----
                                                                            (IN THOUSANDS)
                <S>                                                  <C>                <C>
                Net Sales.......................................     $113,223           $115,127
                Net loss........................................          (12)            (3,973)
</TABLE>

                                     F-10
<PAGE>

                     BURKE INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     The pro forma results of operations have been prepared for comparison
purposes only, and do not purport to be indicative of what the results would
have been had the Mercer acquisition occurred at the beginning of each period
presented. The pro forma results for fiscal year ended 1997 include certain
charges related to the Recapitalization (Note 1).

3.   INVENTORIES

     Inventories consist of the following at the fiscal year ended:

<TABLE>
<CAPTION>
                                                                        1998               1997
                                                                             (IN THOUSANDS)
                <S>                                                    <C>               <C>
                Raw materials...................................      $ 5,123            $ 4,626
                Work-in-process.................................        2,085              1,593
                Finished goods..................................        7,366              4,968
                                                                      -------            -------
                                                                      $14,574            $11,187
                                                                      -------            -------
                                                                      -------            -------
</TABLE>

4.   GOODWILL AND LONG-LIVED ASSETS


     Goodwill represents the excess of the purchase price of acquired companies
over the estimated fair value of the tangible and specifically identified
intangible net assets acquired. In accordance with Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets
and for the Long-Lived Assets to Be Disposed Of" (FAS 121), the carrying value
of long-lived assets and related goodwill is reviewed if the facts and
circumstances suggest that they may be impaired. If this review indicates that
the carrying value of these assets will not be recoverable, as determined based
on the undiscounted net cash flows of the entity acquired over the remaining
amortization period, the Company's carrying value is reduced to its estimated
fair value (based on an estimate of discounted future net cash flows).

     Goodwill related to the Mercer acquisition is being amortized on a
straight-line basis over fifteen years. Goodwill related to prior transactions
is being amortized on a straight-line basis over forty years. Accumulated
amortization totaled $1,779,000 and $367,000 at fiscal years ended 1998 and
1997, respectively.

5.   LONG-TERM DEBT AND LEASE OBLIGATIONS

     SENIOR NOTES DUE 2007

     The Senior Notes bear interest at a rate of 10% per annum. Interest on the
Senior Notes is payable semiannually, commencing February 15, 1998. The Senior
Notes mature on August 15, 2007.

     At any time on or before August 15, 2000, the Company may redeem up to 35%
in aggregate principal amount of (i) the initial aggregate principal amount of
the Senior Notes and (ii) the initial principal amount of any additional notes,
on one or more occasions, with the net cash proceeds of one or more public
equity offerings at a redemption price of 110% of the principal amount thereof,
plus accrued and unpaid interest thereon to the redemption date, provided that
at least 65% of the sum of (i) the initial aggregate principal amount of the
Senior Notes and (ii) the initial aggregate principal amount of additional notes
remain outstanding immediately after redemption. The Senior Notes are redeemable
by the Company at stated redemption prices beginning in August 2002.

                                     F-11
<PAGE>

                     BURKE INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     The Senior Notes are general unsecured obligations of the Company and
senior to all existing and future subordinated indebtedness of the Company. The
obligations of the Company under the bank credit facility are secured by
substantially all of the assets of the Company. Accordingly, such secured
indebtedness ranks senior to the Senior Notes.

     The Senior Notes restrict, among other things, the Company's ability to
incur additional indebtedness, pay dividends or make certain other restricted
payments, incur liens, sell preferred stock of subsidiaries, apply net proceeds
from certain asset sales, merge or consolidate with any other person, sell,
assign, transfer, lease, convey or otherwise dispose of substantially all of the
assets of the Company or enter into certain transactions with affiliates.

     The Company believes the fair value of the Senior Notes at fiscal year end
1998 approximates the carrying value of such indebtedness issued based upon the
incremental borrowing rate for similar types of instruments.

     FLOATING-RATE NOTES

     The Floating-Rate Notes issued in connection with the Mercer acquisition
mature on August 15, 2007, with interest on the notes payable semiannually on
February 15 and August 15, commencing on August 15, 1998. The Floating-Rate
Notes bear interest at a rate per annum equal to LIBOR plus 400 basis points,
with the interest rate set semiannually (9.7% at fiscal year end 1998). The
Floating-Rate Notes are unconditionally guaranteed on a joint and several basis
by each of the Company's subsidiaries. Upon a change of control of the Company,
the Company will be required to make an offer to repurchase all outstanding
Floating-Rate Notes at 101% of the aggregate principal amount thereof plus
accrued and unpaid interest thereon at the date of repurchase.

     The Company believes the fair value of the Floating-Rate Notes at fiscal
year end 1998 approximates the carrying value of such indebtedness as the
interest rate is variable and resets frequently.

     BANK CREDIT FACILITY

     In fiscal year 1998, the Company revised its Loan and Security Agreement
with a bank to provide the Company with a $25.0 million revolving credit
facility expiring August 20, 2002. No amounts are outstanding at fiscal year end
1998 or 1997.

     Indebtedness of the Company under the agreement is secured by a first
priority security interest in substantially all of the Company's assets.

     Indebtedness under the agreement bears interest at a floating rate of
interest equal to, at the Company's option, the eurodollar rate for one, two,
three or six months, plus 2.50% or the bank's prime rate.

     Advances under the agreement are limited to the lesser of (a) $25.0 million
and (b)(i) 85% of eligible accounts receivable plus (ii) 50% of eligible
inventory minus (iii) the aggregate amount of all undrawn letters of credit
issued plus the aggregate amount of any unreimbursed drawings under any
outstanding letters of credit. Letters of credit up to a maximum of $3.0 million
may be issued under the bank credit facility.

                                     F-12
<PAGE>

                     BURKE INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     The credit agreement contains restrictions on the incurrence of debt, the
sale of assets, mergers, acquisitions and other business combinations, voluntary
prepayment of other debt of the Company, transactions with affiliates,
investments, as well as prohibitions on the payment of dividends to, or the
repurchase or redemption of stock from, shareholders, and various financial
covenants, including covenants requiring the maintenance of fixed charge
coverage. At fiscal year end 1998, the Company was not in compliance with
certain of these covenants. On March 16, 1999, the Company obtained a waiver
from the bank and amended future covenants.

     INTEREST EXPENSE

     Interest expense consists of the following:
<TABLE>
<CAPTION>
                                                                                 FISCAL YEAR ENDED
                                                                      ---------------------------------------
                                                                      1998             1997              1996
                                                                      ----             ----              ----
                                                                                  (IN THOUSANDS)
                <S>                                                 <C>                <C>              <C>
                Interest incurred.............................      $14,062            $5,900           $2,771
                Capitalized...................................          (13)              (29)             (19)
                Interest income...............................         (230)             (463)             (84)
                                                                    -------            ------           ------
                Interest expense, net.........................      $13,819            $5,408           $2,668
                                                                    -------            ------           ------
                                                                    -------            ------           ------
</TABLE>

     Included in interest expense is $142,000 and $212,000 of interest incurred
on subordinated shareholder notes in fiscal years 1997 and 1996, respectively.
There was no interest payable to these shareholders at fiscal year ended 1997,
and such subordinated notes were repaid in connection with the Recapitalization
of the Company.


     DEFERRED FINANCING COSTS

     In connection with the issuance of the Floating-Rate Notes, Senior Notes
and bank credit facility agreement, the Company incurred debt issuance costs of
$7,513,000 that are being amortized to interest expense over the terms of the
related debt. Accumulated amortization at fiscal year end 1998 and 1997 was
$971,000 and $219,000, respectively.

     LEASE OBLIGATIONS

     The Company leases certain manufacturing, warehousing, and administrative
space under noncancelable operating leases. At fiscal year ended 1998, future
minimum payments under noncancelable operating leases are as follows (in
thousands):

<TABLE>
                <S>                                                           <C>
                1999................................................          $1,985
                2000................................................           1,705
                2001................................................           1,117
                2002................................................             829
                2003................................................             560
                Beyond 2003.........................................           1,686
                                                                              ------
                                                                              $7,882
                                                                              ------
                                                                              ------
</TABLE>

     Rental expense was $2,082,000, $1,404,000, and $1,143,000 in fiscal years
1998, 1997, and 1996, respectively. Rental expense is before sublease income of
$325,000 in 1998, $316,000 in 1997 and

                                     F-13
<PAGE>

                     BURKE INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


$206,000 in 1996. Future sublease rental income commitments aggregated 
$975,000 at fiscal year ended 1998.

6.   REDEEMABLE PREFERRED STOCK

     In connection with the Recapitalization transaction, the Company issued
16,000 shares of redeemable preferred stock designated as Series A 11.5%
Cumulative Redeemable Preferred Stock and 2,000 shares of redeemable preferred
stock designated as Series B 11.5% Cumulative Redeemable Preferred Stock for
cash proceeds of $18 million, less issuance costs of $106,000, less the $2.5
million value assigned to warrants to purchase common shares issued to holders
of preferred stock. The excess of redemption value over the carrying value is
being accreted by periodic charges to retained earnings (accumulated deficit)
through February 2008.

     Dividends will be payable to holders of the redeemable preferred stock, at
the annual rate per share of 11.5% times the sum of $1,000 and accrued but
unpaid dividends. Dividends shall be payable at the annual rate per share of
0.115 shares of redeemable preferred stock through July 15, 2000, and in cash
after July 15, 2000.

     Dividends will be payable quarterly on January 15, April 15, July 15, and
October 15 of each year, commencing October 15, 1997. Dividends shall be fully
cumulative and shall accrue on a quarterly basis.

     If at any time after July 15, 2000, the cash dividends payable on the
redeemable preferred stock shall have been in arrears and unpaid for four or
more successive dividend payment dates, then until the date on which all such
dividends in arrears are paid in full, dividends shall accrue and be payable to
the holders at the annual rate of 13.5% times the sum of $1,000 per share and
accrued but unpaid dividends thereon. Upon payment in full of all dividends in
arrears, cash dividends will thereafter be payable at the 11.5% annual rate set
forth above. There were no dividends in arrears as of fiscal year ended 1998.

     Holders of shares of redeemable preferred stock shall be entitled to
receive the stated liquidation value of $1,000 per share, plus an amount per
share equal to any dividends accrued but unpaid, in the event of any
liquidation, dissolution or winding up of the Company. After payment of the full
amount of the liquidation preference, holders of shares of redeemable preferred
stock will not be entitled to any further participation in any distribution of
assets of the Company.

     The Company may, at its option, redeem at any time, all or any portion of
the shares of the redeemable preferred stock, at a redemption price per share
equal to 100% of the liquidation preference on the date of redemption.

     On February 20, 2008, the Company shall redeem any and all outstanding
shares of redeemable preferred stock, at a redemption price per share equal to
100% of the liquidation preference.

     Upon the occurrence of a change of control (as defined), the redeemable
preferred stock shall be redeemable at the option of the holders, at a
redemption price per share equal to 100% of the liquidation preference.

     The holders of shares of redeemable preferred stock shall not be entitled
to any voting rights. However, without the consent of the holders of at least
two-thirds of the outstanding shares of redeemable

                                     F-14
<PAGE>

                     BURKE INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


preferred stock, the Company may not change the powers or preferences of the 
redeemable preferred stock, create, authorize or issue any shares of capital 
stock ranking senior or on a parity with the redeemable preferred stock or 
create, authorize or issue any shares of capital stock constituting junior 
securities, unless such junior securities are subordinate in right of payment 
to the redeemable preferred stock.

     If at any time after October 15, 2000, any amount of cash dividends payable
on the Series A Redeemable Preferred Stock shall have been in arrears and unpaid
for four or more successive dividend payment dates, then the holders of the
Series A Redeemable Preferred Stock, shall have the right to elect the smallest
number of directors constituting one-third of the authorized number of
directors, and the holders of the common stock shall have the right to elect the
remaining directors.

     If the Company fails to redeem shares of Series A Redeemable Preferred
Stock in accordance with the mandatory redemption provisions described above,
then the holders of the Series A Redeemable Preferred Stock shall have the right
to elect the smallest number of directors constituting a majority of the
authorized number of directors, and the holders of the common stock shall have
the right to elect the remaining directors.

     The right of the holders of Series A Redeemable Preferred Stock to elect
directors pursuant to the provisions described above shall continue until such
time as all such dividends in arrears are paid in full or all shares of Series A
Redeemable Preferred Stock shall have been redeemed pursuant to the mandatory
redemption provisions.

7.   SHAREHOLDERS' EQUITY

     CONVERTIBLE PREFERRED STOCK

     In connection with the Mercer acquisition, the Company issued $3 million in
Series C Convertible Preferred Stock. The Series C Convertible Preferred Stock
ranks junior to the Redeemable Preferred Stock and when declared, dividends
accrue at an annual rate per share of 6% times the sum of $1,000 and accrued but
unpaid dividends. The holders of Series C Convertible Preferred Stock are
entitled to receive a stated liquidation value of $1,000 per share plus accrued
but unpaid dividends in the event of any liquidation, dissolution or winding up
of the Company. After payment of the liquidation preference, the holders of the
Series C Convertible Preferred Stock are not entitled to further participation
in any distribution of assets of the Company. The holders of Series C
Convertible Preferred Stock are not entitled to any voting rights; however,
without the consent of 51% of the holders of Series C Convertible Preferred
Stock, the Company may not adversely alter the rights and preferences of the
Series C Convertible Preferred Stock.

     Upon the occurrence of a triggering event, the holders of Series C
Convertible Preferred Stock have the option to convert such shares into common
stock at a conversion price of $10 per share, subject to anti-dilution
provisions. A triggering event includes a change of control, an initial public
offering, notice by the Company of an intent to redeem the Convertible Preferred
Stock or the fifth anniversary of the issuance of the Convertible Preferred
Stock.

     COMMON STOCK

                                     F-15
<PAGE>

                     BURKE INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     At fiscal year ended 1998 a total of 964,000 shares of Class A common stock
are reserved for the exercise of warrants and 500,000 shares are reserved under
the 1997 Stock Option Plan.

     For shareholder warrants issued in connection with debt, the aggregate
increase in the difference between the fair value of the Class A common stock
and the exercise price of the shareholder warrants ($1,241,000 in 1996) has been
charged to accumulated deficit. In connection with the Recapitalization
transaction, these shareholder warrants were repurchased and the resulting
$5,100,000 increase in value was charged to accumulated deficit.

     On October 25, 1996, the Company loaned $4,000,000 to an affiliate of a
then principal shareholder and such amount was repaid in connection with the
Recapitalization transaction. The Company was charged an annual management fee
by an affiliate of the then principal shareholders of $250,000 in fiscal year
1996.

     STOCK OPTIONS

     Prior to the Recapitalization, the Company maintained the 1989 Stock Option
Plan and granted nonqualified options not pursuant to a formal plan. In
connection with the Recapitalization, all vested option holders received cash
payment in cancellation of their options totaling $14.1 million and the Company
recorded $14.1 million in compensation expense. All unvested options were
canceled in connection with the Recapitalization.

     Under the 1997 Stock Option Plan (the Plan), incentive stock options to
purchase up to a total of 500,000 shares of common stock may be granted to
officers, directors, executives, and employees at the discretion of the Board of
Directors. Incentive stock options must be granted at not less than one hundred
percent of the fair market value of the shares of stock on the date of the
granting of the option if the optionee is not a ten percent shareholder, or one
hundred and ten percent of the fair market value of the shares of stock on the
date of the granting of the option if the optionee is a ten percent shareholder.
Options vest as determined by the Board of Directors.

     A summary of all stock option activity is as follows:

<TABLE>
<CAPTION>
                                                                                                       WEIGHTED
                                                                                      OPTIONS       AVERAGE PRICE
                                                                                    OUTSTANDING       PER SHARE
                                                                                    -----------     -------------
                <S>                                                                 <C>             <C>
                                                                                           (IN THOUSANDS,
                                                                                       EXCEPT PER SHARE PRICE)
                Balance at fiscal year ended 1995............................           1,259               $0.425
                    Granted..................................................             618               $1.500
                    Exercised................................................            (181)              $0.425
                    Canceled.................................................             (96)              $0.425
                                                                                       ------
                Balance at fiscal year ended 1996............................           1,600               $0.840
                    Granted..................................................             370               $6.50
                    Exercised................................................             (22)              $0.425
                    Canceled.................................................          (1,578)              $0.846
                                                                                       ------
                Balance at fiscal year ended 1997............................             370               $6.50
                    Granted..................................................              68              $10.00
                    Exercised................................................              --                  --
                    Canceled.................................................              --                  --
                                                                                       ------
                Balance at fiscal year ended 1998                                         438               $7.04
                                                                                       ------               -----
                                                                                       ------               -----
</TABLE>

                                     F-16
<PAGE>

                     BURKE INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     At fiscal year end 1998, options to purchase 92,500 shares of common 
stock are exercisable (1997 - none) and the weighted average remaining 
contractual life is 9 years (1997 - 10 years).

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

     Pro forma information regarding net loss has been determined as if the 
Company had accounted for its employee stock options under the fair value 
method of FAS 123. The fair value for all options granted was estimated at 
the date of grant using the minimum value options pricing model with the 
following weighted average assumptions: a risk-free interest rate of 5.50%; 
no dividend yield; and a weighted average expected life of the option of five 
years. The weighted average fair value of these options granted was $2.40 per 
share for 1998.

     The Minimum Value option valuation method may be used by companies 
without publicly traded equity to value an award. Option valuation models 
require the input of highly subjective assumptions, including expected stock 
price volatility. Because the Company's employee stock options have 
characteristics significantly different from those of traded options and 
because changes in the subjective input assumptions can materially affect the 
fair value estimate, in management's opinion, the existing models do not 
necessarily provide a reliable single measure of the fair value of its 
employee stock options.

     Had compensation costs for the Company's stock option plan been 
determined on the fair value at the grant dates for awards under the plan 
consistent with the method of FAS 123, the Company's pro forma net loss would 
have been $64,000 for the fiscal year end 1998.

     The effect of applying the FAS 123 minimum value method to the stock 
options granted in fiscal years ended 1997 and 1996 would not result in pro 
forma (loss) income materially different from historical amounts reported. 
Therefore, such pro forma information and weighted average assumptions 
specified in FAS 123 are not separately presented herein for fiscal year end 
1996 and 1997. Future pro forma net income results may be materially 
different from actual amounts reported.

     WARRANTS

     Warrants to purchase 964,000 shares of common stock of the Company at 
the initial exercise price of $4.67 per share were issued to the holders of 
the preferred stock. The warrants are immediately exercisable until February 
20, 2008. The exercise price and number of Warrant Shares are both subject to 
adjustment in certain events.

                                     F-17
<PAGE>

                     BURKE INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.   DISCONTINUED OPERATION

     On June 28, 1996, the Company disposed of certain of the assets related 
to its custom-molded organic rubber products manufacturing operation for cash 
and future consideration. The assets were sold to a newly formed corporation 
that is not related to the Company.

     The 1996 loss from the discontinued operation includes results through 
June 28, 1996. Net sales of the discontinued operation were $4,279,000 in 
1996.

9.   PENSION AND RETIREMENT PLANS

     The Company maintains a defined benefit pension plan covering 
substantially all of its hourly employees in San Jose, California. The 
benefits are based on years of service and the benefit credit rates stated in 
the provisions of the plan. The Company funds the plan at the minimum amount 
required to be paid under the provisions of the Employee Retirement and 
Income Security Act of 1976 (ERISA). Contributions are intended to provide 
for benefits attributed to service to date as well as for those expected to 
be earned in the future.

     The following tables set forth the plan's funded status and amounts 
recognized in the Company's consolidated balance sheets at fiscal year end:

<TABLE>
<CAPTION>

                                                                                 1998             1997
                                                                                -------         -------
                                                                                     (IN THOUSANDS)
           <S>                                                                   <C>             <C>
           CHANGE IN BENEFIT OBLIGATION
                Benefit obligation at beginning of year.......                   $3,018          $2,894
                Service cost..................................                       67              60
                Interest cost.................................                      252             220
                Actuarial loss................................                      204             108
                Benefits paid.................................                     (141)           (264)
                                                                                 ------          ------
                Benefit obligation at end of year.............                   $3,400          $3,018
                                                                                 ------          ------
                                                                                 ------          ------

           CHANGE IN PLAN ASSETS
                Fair value of plan assets at beginning of year                   $3,066          $2,920
                Actual return on plan assets..................                      463             254
                Employer contribution.........................                      103             156
                Benefits paid.................................                     (141)           (264)
                                                                                 ------          ------
                Fair value of plan assets at end of year......                   $3,491          $3,066
                                                                                 ------          ------
                                                                                 ------          ------

                Funded status.................................                      $91             $48
                Unrecognized net actuarial loss...............                      132             116
                Unrecognized prior service cost...............                      275             337
                                                                                 ------          ------
                Prepaid benefit cost .........................                     $498            $501
                                                                                 ------          ------
                                                                                 ------          ------

           WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
                Discount Rate.................................             8.00%             8.25%
                Expected return on plan assets................             9.00%             9.00%

</TABLE>

                                      F-18

<PAGE>

                     BURKE INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     Net periodic pension expense for the fiscal years ended 1998, 1997, and
1996 included the following components:

<TABLE>
<CAPTION>
                                                                        1998         1997         1996
                                                                       -----         ----         ----
                                                                                (IN THOUSANDS)
           <S>                                                          <C>         <C>           <C>
           COMPONENTS OF NET PERIODIC BENEFIT COST:                                 
                Service cost--benefits earned during the year.           $67         $58           $65
                Interest cost on projected benefit obligation .          252         220           193
                Expected return on plan assets.............             (275)       (254)         (233)
                Amortization of prior service cost.........               62          44            58
                                                                       -----       -----          ----
                Net periodic pension cost..................             $106         $68           $83
                                                                       -----       -----          ----
                                                                       -----       -----          ----
</TABLE>

     The Company also maintains a defined contribution 401(k) plan covering 
substantially all of its other regular employees. The employees become 
eligible for participation after 1,000 hours of service. Participants may 
elect to contribute up to 20% of their compensation to this plan, subject to 
Internal Revenue Service (IRS) limits. The Company matches a portion of the 
employees' contribution. The Company contributed approximately $164,000, 
$156,000, and $113,000, to this plan in 1998, 1997, and 1996, respectively.

     The Company also sponsors a defined contribution 401(k) plan for the 
employees in the Mercer business. Participation in this plan is available to 
all salaried and hourly employees of the Company who work in the Mercer 
business. Participating employees contribute to the 401(k) plan based on a 
percentage of their compensation which is matched, based on a percentage of 
employee contributions, by the Company. The Company contributed approximately 
$93,000 to the plan subsequent to the Mercer acquisition in 1998.

     The Company also has a deferred compensation program for certain 
officers and employees. Such deferred amounts are fully vested and are 
payable upon termination of employment, death or retirement. Each 
participant's account accrues investment income based upon the investment 
election of the participant. The accumulated amount deferred as of fiscal 
year end 1998 is $532,000 (1997 - $296,000).

10.  INCOME TAXES

     The income tax provision (benefit) recognized in the consolidated 
statements of operations consists of the following:

<TABLE>
<CAPTION>

                                                                  1998             1997              1996
                                                                  ----             ----              ----
                                                                              (IN THOUSANDS)
          <S>                                                      <C>            <C>               <C>
          Current:
            Federal....................................             $38             $(383)          $2,171
            State......................................             194               (38)             493
                                                                   ----           -------          -------
                                                                    232              (421)           2,664
          Deferred:

            Federal....................................              26            (1,211)             150
            State......................................             (98)             (186)              91
                                                                   ----           -------          -------
                                                                    (72)           (1,397)             241
                                                                   ----           -------          -------
                                                                   $160           $(1,818)          $2,905
                                                                   ----           -------          -------
                                                                   ----           -------          -------
</TABLE>

     In 1996 and 1997, the Company settled with the IRS certain issues 
relating to the Company's income tax returns for 1988 through 1990 and 1992 
through 1993, respectively. As of fiscal year ended 1997, the Company had 
fully provided for the taxes and interest which are payable as a result of 
the settlements.

     A reconciliation of the income tax (benefit) provision at the U. S. 
federal statutory rate (34%) to the income tax (benefit) provision at the 
effective tax rate is as follows:

                                      F-19
<PAGE>

                     BURKE INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

                                                                      1998             1997              1996
                                                                      ----             ----              ----
                                                                                  (IN THOUSANDS)
              <S>                                                      <C>            <C>               <C>
              Income taxes computed at the U.S. federal
                statutory rate.............................             $65           $(1,958)          $2,382
              State taxes (net of federal effect)..........             110              (148)             385
              Tax  credits.................................             (47)               --               --
              Federal and state audit provision............              --               200               --
              Other individually immaterial items..........              32                88              138
                                                                       ----           -------           ------
              Income tax (benefit) provision...............            $160           $(1,818)          $2,905
                                                                       ----           -------           ------
                                                                       ----           -------           ------

</TABLE>

     Deferred income taxes reflect the net tax effects of temporary 
differences between the carrying amounts of assets and liabilities for 
financial reporting purposes and the amounts used for income tax purposes. 
Significant components of the Company's deferred tax assets and liabilities 
at fiscal years ended 1998 and 1997 are as follows:

<TABLE>
<CAPTION>

                                                                                       1998             1997
                                                                                      -------          ------
                                                                                           (IN THOUSANDS)
              <S>                                                                     <C>              <C>
              Deferred tax liabilities:
                  Basis differences between financial reporting and tax basis...         $(3,108)         $(2,964)
                  Depreciation..................................................            (958)            (900)
                  Other.........................................................            (122)            (117)
                                                                                         -------          -------
                  Total deferred tax liabilities................................          (4,188)          (3,981)
              Deferred tax assets:                                              
                  Net operating loss and tax credit carryforwards...............             888            1,853
                  Receivable allowances and inventory reserves..................           1,064              433
                  State taxes...................................................             188                1
                  Warranty reserve and other accruals...........................             585              166
                  Accrued vacation and employee benefits........................             373              291
                  Other.........................................................             116              191
                                                                                         -------          -------
                  Total deferred tax assets.....................................           3,214            2,935
                                                                                         -------          -------
              Net deferred tax liability........................................           $(974)         $(1,046)
                                                                                         -------          -------
                                                                                         -------          -------
</TABLE>

     As of fiscal year end 1998, the Company has federal and state net 
operating loss carryforwards of approximately $2.1 million and $0.6 million, 
respectively. The net operating loss carryforwards will expire in the years 
2002 through 2012, if not utilized.

11.  SEGMENT INFORMATION

     The Company has two reportable segments: organic products and silicone 
products. The organic products group produces and distributes rubber and 
vinyl wall base, other floor covering accessory products, flexible membranes 
and other organic rubber products. The silicone products group produces and 
distributes precision silicone seals and other products used on commercial 
and military aircraft as well as high performance silicone truck and bus 
engine hoses and other silicone rubber products.

     The Company evaluates performance and allocates resources based on the 
operating income or loss before taxes, interest, corporate general and 
administrative expenses and amortization expense related to goodwill from the 
Mercer Acquisition. The accounting policies of the reportable segments are 
the same as those described in the summary of significant accounting 
policies. There are no intersegment sales or transfers.

                                      F-20

<PAGE>

                     BURKE INDUSTRIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     The Company's reportable segments are business units that offer 
different products. The reportable segments are each managed separately 
because they manufacture and distribute distinct products with different 
production processes.

<TABLE>
<CAPTION>

FISCAL YEAR ENDED 1998                                 ORGANIC PRODUCTS    SILICONE PRODUCTS         TOTAL
----------------------                                 ----------------    -----------------         -----
                                                                             (IN THOUSANDS)
<S>                                                         <C>                  <C>               <C> 
Revenues from external customers..................          $56,856              $50,163           $107,019
Depreciation expense..............................            1,097                  667              1,764
Segment profit....................................            9,865                7,239             17,104
Segment assets....................................           31,174               18,210             49,384
Expenditures for long-lived assets................            1,555                  257              1,812
                                                  
PROFIT                                            
Total profit for reportable segments..............                                                  $17,104
Unallocated items:
  Corporate general and administrative expenses...                                                    1,721
  Amortization of goodwill related to the
  Mercer acquisition..............................                                                    1,374
  Interest expense, net...........................                                                   13,819
                                                                                                    -------
Income before income taxes........................                                                     $190
                                                                                                    -------
                                                                                                    -------

ASSETS
Total assets for reportable segments..............                                                  $49,384
Other assets, primarily goodwill and other
  intangibles.....................................                                                   44,561
                                                                                                    -------
Total consolidated assets.........................                                                  $93,945
                                                                                                    -------
                                                                                                    -------
</TABLE>

OTHER SIGNIFICANT ITEMS

<TABLE>
<CAPTION>

                                              SEGMENT TOTALS           ADJUSTMENTS        CONSOLIDATED TOTALS
                                              --------------           -----------        -------------------
                                                                     (IN THOUSANDS)
<S>                                             <C>                     <C>                     <C>
Expenditures for long-lived assets              $1,812                  $1,408 (1)              $3,220

</TABLE>

(1) Consists of expenditures for long lived assets not directly related to
either segment.

MAJOR CUSTOMER

         Revenue from one customer of the silicone products segment 
represents approximately $10 million of the Company's consolidated revenue.

12.      SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>

                                                                 1998             1997             1996
                                                               -------           ------           ------
                                                                             (IN THOUSANDS)
<S>                                                            <C>                <C>             <C>
Cash paid for interest.....................................    $12,223            $2,059          $1,950
Cash paid for income taxes.................................        484             3,047           2,771

</TABLE>
                                     F-21
<PAGE>



                     INDEX TO FINANCIAL STATEMENT SCHEDULES

                                                                    PAGE
Report of Ernst & Young, LLP, Independent Auditors.                  S-2

Schedule II--Valuation and Qualifying Accounts.                      S-3

                                      S-1
<PAGE>

                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

     We have audited the consolidated financial statements of Burke Industries,
Inc. as of January 1, 1999 and January 2, 1998, and for each of the three years
in the period ended January 1, 1999, and have issued our report thereon dated
February 26, 1999, except paragraph 12 of Note 5, as to which the date is March
16, 1999. Our audits also included the financial statement schedule listed in
the index at Item 14(a)(2). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.

     In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.


                                               /s/ ERNST & YOUNG LLP


San Jose, California
February 26, 1999, except paragraph 12 of Note 5, as to which the date is 
March 16, 1999

                                      S-2
<PAGE>

                                   SCHEDULE II

                         VALUATION & QUALIFYING ACCOUNTS

                              BURKE INDUSTRIES INC.

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                        ADDITIONS
                                                                --------------------------
                                                BALANCE AT      CHARGED TO     ACQUISITION                     
                                               BEGINNING OF     COSTS AND       OF MERCER          (a)         BALANCE AT
DESCRIPTION                                       PERIOD         EXPENSES        PRODUCTS      DEDUCTIONS    END OF PERIOD
-----------                                    ------------     ----------     -----------     ----------    -------------
<S>                                            <C>              <C>            <C>             <C>           <C>
Allowance for doubtful accounts
   (deducted from accounts receivable)
   Year ended January 1, 1999.........                $334           $196            $300             $18           $812
   Year ended January 2, 1998.........                 189            240              --              95            334
   Year ended January 3, 1997.........                 336            225              --             372            189
</TABLE>

------------------------
(a)      Includes write-offs and reversals.

                                     S-3
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of San
Jose, State of California on the 23rd day of March, 1999.

                                       BURKE INDUSTRIES, INC.,
                                       a California corporation

                                       By:  /s/ ROCCO C. GENOVESE
                                            ---------------------
                                            Rocco C. Genovese
                                            VICE CHAIRMAN, CHIEF EXECUTIVE 
                                            OFFICER AND PRESIDENT

<TABLE>
<CAPTION>
      SIGNATURE                                         TITLE                              DATE
      ---------                                         -----                              ----
<S>                                  <C>                                           <C>
/s/ ROCCO G. GENOVESE                Vice Chairman, Chief Executive 
-----------------------------        Officer and President (Principal              March 23, 1999
Rocco G. Genovese                    Executive Officer)


/s/ DAVID E. WORTHINGTON             Treasurer, Vice President--Finance
-----------------------------        (Principal Financial and                      March 23, 1999
David E. Worthington                 Accounting Officer)  


/s/ REED C. WOLTHAUSEN               Director
-----------------------------                                                      March 23, 1999
Reed C. Wolthausen                                                                


/s/ JOHN F. LEHMAN                   Director
-----------------------------                                                      March 23, 1999
John F. Lehman                                                                  


/s/ DONALD GLICKMAN                  Director
-----------------------------                                                      March 23, 1999
Donald Glickman                                                                  


/s/ GEORGE SAWYER                    Director
-----------------------------                                                      March 23, 1999
George Sawyer                                                                 


/s/ KEITH OSTER                      Director
-----------------------------                                                      March 23, 1999
Keith Oster                                                                  


/s/ OLIVER C. BOILEAU                Director
-----------------------------                                                      March 23, 1999
Oliver C. Boileau                                                             


/s/ THOMAS G. POWNALL                Director
-----------------------------                                                      March 23, 1999
Thomas G. Pownall                                                               
</TABLE>

                                     II-1
<PAGE>

<TABLE>
<CAPTION>
      SIGNATURE                                         TITLE                              DATE
      ---------                                         -----                              ----
<S>                                  <C>                                           <C>
/s/ BRUCE D. GORCHOW                 Director
-----------------------------                                                      March 23, 1999
Bruce D. Gorchow                                                                


/s/ JOSEPH A. STROUD                 Director
-----------------------------                                                      March 23, 1999
Joseph A. Stroud                                                                
</TABLE>

                                     II-2
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of San
Jose, State of California on the 23rd day of March, 1999.

                                       BURKE FLOORING PRODUCTS, INC.,
                                       a California corporation

                                       By: /s/ ROCCO C. GENOVESE              
                                           ---------------------
                                           Rocco C. Genovese
                                           PRESIDENT

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.

<TABLE>
<CAPTION>
      SIGNATURE                                         TITLE                              DATE
      ---------                                         -----                              ----
<S>                                  <C>                                           <C>
/s/ ROCCO G. GENOVESE                President (Principal Executive Officer)
-----------------------------                                                      March 23, 1999
Rocco G. Genovese                                                               


/s/ DAVID E. WORTHINGTON             Vice President--Finance (Principal
-----------------------------        Financial and Accounting Officer)             March 23, 1999
David E. Worthington                                        


/s/ KEITH OSTER                      Director
-----------------------------                                                      March 23, 1999
Keith Oster                                                                  
</TABLE>

                                     II-3
<PAGE>


                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of San
Jose, State of California on the 23rd day of March, 1999.

                                       BURKE RUBBER COMPANY, INC.,
                                       a California corporation

                                       By: /s/ ROCCO C. GENOVESE              
                                           ---------------------
                                           Rocco C. Genovese
                                           PRESIDENT

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.

<TABLE>
<CAPTION>
      SIGNATURE                                         TITLE                              DATE
      ---------                                         -----                              ----
<S>                                  <C>                                           <C>
/s/ ROCCO G. GENOVESE                President (Principal Executive Officer)
-----------------------------                                                      March 23, 1999
Rocco G. Genovese                                                               


/s/ DAVID E. WORTHINGTON             Vice President--Finance (Principal
-----------------------------        Financial and Accounting Officer)             March 23, 1999
David E. Worthington                                        


/s/ KEITH OSTER                      Director
-----------------------------                                                      March 23, 1999
Keith Oster                                                                  
</TABLE>

                                     II-4

<PAGE>


                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of San
Jose, State of California on the 23rd day of March, 1999.

                                       BURKE CUSTOM PROCESSING, INC.,
                                       a California corporation

                                       By: /s/ ROCCO C. GENOVESE              
                                           ---------------------
                                           Rocco C. Genovese
                                           PRESIDENT

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.

<TABLE>
<CAPTION>
      SIGNATURE                                         TITLE                              DATE
      ---------                                         -----                              ----
<S>                                  <C>                                           <C>
/s/ ROCCO G. GENOVESE                President (Principal Executive Officer)
-----------------------------                                                      March 23, 1999
Rocco G. Genovese                                                               


/s/ DAVID E. WORTHINGTON             Vice President--Finance (Principal
-----------------------------        Financial and Accounting Officer)             March 23, 1999
David E. Worthington                                        


/s/ KEITH OSTER                      Director
-----------------------------                                                      March 23, 1999
Keith Oster                                                                  
</TABLE>

                                     II-5

<PAGE>

                                  EXHIBIT INDEX

 1.1    Purchase Agreement, dated April 17, 1998 between the Company and the 
          Initial Purchaser.(1)

 2.1    Stock Purchase Agreement, dated as of March 5, 1998 among Burke, 
          Sovereign and Mercer.(2)

 3.1    Articles of Incorporation of the Company.(3)

 3.2    Bylaws of the Company.(3)

 3.3    Articles of Incorporation of Burke Flooring Products, Inc.(3)

 3.4    Bylaws of Burke Flooring Products, Inc.(3)

 3.5    Articles of Incorporation of Burke Rubber Company, Inc.(3)

 3.6    Bylaws of Burke Rubber Company, Inc.(3)

 3.7    Articles of Incorporation of Burke Custom Processing, Inc.(3)

 3.8    Bylaws of Burke Custom Processing, Inc.(3)

 3.9    Articles of Incorporation of Mercer Products Company, Inc.(1)

 3.10   Bylaws of Mercer Products Company, Inc.(1)

 4.1    Indenture among the Company, the Subsidiary Guarantors and United 
          States Trust Company of New York, relating to the Floating-Rate 
          Notes, dated as of April 21, 1998.(1)

 4.2    First Supplemental Indenture, dated April 21, 1998, between the 
          Company, the Subsidiary Guarantors and United States Trust Company 
          of New York.(1)

 4.3    Form of Note (included in Exhibit 4.1).(1)

 4.4    Registration Rights Agreement, dated April 21, 1998, between the 
          Company and the Holders.(1)

10.1    Purchase Agreement, dated August 14, 1997, between the Company 
          and the Initial Purchaser.(3)

10.2    Agreement and Plan of Merger, dated as of August 13, 1997, by 
          and among the Company, the Company Shareholders, JFLEI and Merger 
          Co.(3)

10.3    Indenture among the Company, the Subsidiary Guarantors and United 
          States Trust Company of New York, relating to the Fixed Rate Notes, 
          dated as of August 20, 1997.(3)

10.4    Registration Rights Agreement, dated August 20, 1997, between the 
          Company and the Fixed Rate Note Holders.(3)

10.5    Loan and Security Agreement, dated as of August 20, 1997, between 
          the Company, the Lenders and NationsBank, N.A.(3)

10.6    Amendment No. 1, Waiver Joinder Agreement to Loan Security Agreement, 
          dated April 21, 1998, between the Company, Mercer and NationsBank, 
          N.A. (1)

10.7    Form of Revolving Notes (included in Exhibit 10.6). (1)

10.8    Subsidiary Guaranty, dated August 20, 1997, between the Company 
          and the Subsidiaries.(3)

<PAGE>

10.9    Subsidiary Security Agreement, dated as of August 20, 1997, between 
          the Company and the Subsidiaries.(3)

10.10   Assignment for Security, dated April 21, 1998, by Mercer.(1)

10.11   First Amendment to Deed of Trust with Absolute Assignment of Leases 
          and Rents, Security Agreement and Fixture Filing, dated April 21, 
          1998, between the Company and NationsBank, N.A.(1)

10.12   Florida Mortgage, Security Agreement and Assignment of Leases and 
          Rents, dated April 21, 1998, between Mercer and NationsBank, N.A. 
          (unrecorded)(1)

10.13   Stock Pledge Agreement, dated August 20, 1997.(3)

10.14   Pledge Agreement, dated April 21, 1998, between the Company and 
          NationsBank, N.A.(1)

10.15   Consent Solicitation Statement dated March 30, 1998.(1)

10.16   Form of Consent to Amendments to Indenture.(1)

10.17   Investment Agreement, dated as of August 20, 1997, between the 
          Company and preferred shareholders.(3)

10.18   Shareholders' Agreement, dated as of August 20, 1997, between 
          the Company and the shareholders.(3)

10.19   Shareholders' Registration Rights Agreement, dated as of August 20,
          1997, between the Company and the shareholders.(3)

10.20   Warrantholders' Registration Rights Agreement dated as of August 20,
          1997, between the Company and the warrantholders.(3)

10.21   Form of Warrant Certificate.(3)

10.22   Form of Election Form for Series C Preferred Stock.(1)

10.23   Management Agreement, dated August 20, 1997, between the Company 
          and J.F. Lehman & Company.(3)

10.24   Lease Agreement, dated April 30, 1997, between the Company
          and Senter Properties, LLC for the premises at 2049 Senter
          Road, San Jose, CA.(3)

10.25   Lease Agreement, dated May 1, 1996, between the Company and
          SSMRT Bensonville Industrial Park (3), Inc. for the premises
          at 870 Thomas Drive, Bensonville, Illinois.(3)

10.26   Lease Agreement, dated October 20, 1995, between the Company
          and Lincoln Property Company for the premises at 13767
          Freeway Drive, Santa Fe Springs, CA.(3)

10.27   Lease Agreement, dated April 25, 1983, between the Company
          and Donald M. Hypes for the premises at 14910 Carmenita
          Boulevard, Norwalk, CA.(3)

10.28   Lease Agreement, dated March 29, 1996, between S & M
          Development Co., a general partnership, for the premises at
          13615 Excelsior Drive, Santa Fe Springs, CA.(3)

10.29   Lease Agreement, dated June 5, 1995, between the Company and
          Stephen S. Gray, the duly appointed Chapter 7 trustee of the
          Estate of Haskon Corporation, for the premises at 336 Weir
          Street, Taunton, MA.(3)

10.30   Consent to sale of all of the outstanding shares of Mercer
          Products Company, Inc. to Burke Industries, Inc., dated March
          20, 1998 by Land Co. Leasing & New Development Co. 

<PAGE>

          and related Standard/Industrial Commercial Single-Tenant
          Lease-Gross, dated June 22, 1994, as amended, between The
          Childs Family Trust u/t/a of April 30, 1981 and The A.G.
          Gardner Trust u/t/a of March 5, 1981 dba Landco and
          Mercer.(1)

10.31   Consent of Lessor dated April 21, 1998 and related Agreement
          of Lease dated December 1, 1998, as amended, between RTC
          Properties, Inc. and Mercer.(1)

10.32   Sublease Agreement, dated February 20, 1992, between Burke Rubber
          Company for the premises at 107 South Riverside Drive, Modesto, CA.(3)

10.33   Servicing Agreement, dated April 26, 1996, between the Company and 
          Westland Technologies.(3)

10.34   Amendment No. 1 to the Stock Purchase Agreement, dated April 21, 1998,
          among Burke, Sovereign and Mercer.

10.35   Lease Agreement, dated April 15, 1998, between Robert Steele, et al 
          and the Company, for the premises at 10039 Norwalk Boulevard, Santa 
          Fe Springs, CA.

10.36   Management Services Agreement, dated as of June 18, 1998, between the 
          Company and J.F. Lehman & Company.

10.37   Amendment No. 1 to Management Agreement between the Company and J.F. 
          Lehman & Company, dated as of June 18, 1998.

10.38   Burke Industries, Inc. Deferred Compensation Plan.

10.39   Burke Industries, Inc. 1997 Stock Option Plan.

12.1    Computation of Ratios of Earnings to Fixed Charges and Combined Fixed
          Charges and Preferred Stock Dividends.

21.1    Subsidiaries of the Company.

27.     Financial Data Schedule.

------------------------
(1)  Incorporated by reference to the registrant's Registration Statement on
     Form S-4, File No. 333-36675, as filed with the Securities and Exchange
     Commission on June 19, 1998.

(2)  Incorporated by reference to the Company's 1997 annual report on Form 10-K,
     File No. 333-36675, as filed with the Securities and Exchange Commission on
     April 2, 1998.

(3)  Incorporated by reference to the registrant's Registration Statement on
     Form S-4, File No. 333-36675, as filed with the Securities and Exchange
     Commission on September 29, 1997, as amended.