<PAGE>

================================================================================
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   FORM 10-K

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

  For the fiscal year ended December 31, 1998

                                      OR

  [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
      THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period from ________ to ________ Commission File No. 1-2267


                             THE MEAD CORPORATION
            (Exact name of registrant as specified in its charter)

            Ohio                                         31-0535759
  (State of Incorporation)                  (I.R.S. Employer Identification No.)


                            MEAD WORLD HEADQUARTERS
                          COURTHOUSE PLAZA NORTHEAST
                              DAYTON, OHIO 45463
                   (Address of principal executive offices)

       Registrant's telephone number, including area code:  937-495-6323
       Securities registered pursuant to Section 12(b) of the Act:

                                                     Name of Each Exchange
  Title of Each Class                                 on which Registered
  -------------------                                ---------------------

  Common Shares Without Par Value                    New York Stock Exchange
  and Common Share Purchase Rights                   Chicago Stock Exchange
                                                     Pacific Exchange


                           _________________________

     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. [ ]

                           _________________________

     As of January 22, 1999, the aggregate market value of the voting shares
held by non-affiliates of the Registrant was approximately $3,054,060,558
determined by multiplying the highest selling price of a Common Share on the New
York Stock Exchange--Composite Transactions Tape on such date, times the amount
by which the total shares outstanding exceeded the shares beneficially owned by
directors and executive officers of the Registrant. Such determination shall
not, however, be deemed to be an admission that any person is an "affiliate" as
defined in Rule 405 under the Securities Act of 1933.


     The number of Common Shares outstanding at February 23, 1999 was
101,916,102.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of Registrant's Proxy Statement for the Annual Meeting of
Shareholders scheduled to be held on April 22, 1999, are incorporated by
reference in Part III; definitive copies of said Proxy Statement were filed with
the Securities and Exchange Commission on March 9, 1999.
================================================================================
<PAGE>
 
                                 PART I

Item 1. Business

     Mead manufactures and sells paper, pulp, paperboard, lumber and other wood
products. Mead also manufactures and distributes school and office supplies.

     Mead was incorporated in 1930 under the laws of the state of Ohio as the
outgrowth of a paper manufacturing business founded in 1846, and has its
principal executive offices at Mead World Headquarters, Courthouse Plaza
Northeast, Dayton, Ohio 45463, telephone (937) 495-6323.  Except as otherwise
indicated by the context, the terms "Company" or "Mead" as used herein refer to
The Mead Corporation and its subsidiaries.

Segment Information

     Segment information is also included in Note S on pages 47-49.

                                 Paper

     Mead's Paper division manufactures coated and uncoated papers for use by
book, magazine, catalog, and advertising brochure publishers and commercial
printers; form bond and carbonless paper and papers for conversion by others
into business forms; specialty papers through its Oxford Specialty Papers
business unit; cut-size copier paper; and other uncoated papers for conversion
by others into such products as greeting cards. The division sells papers
nationwide, both on a direct basis to printers and converters and through paper
merchants. Additionally, Escanaba Paper Company and Mead Oxford Corporation,
wholly-owned subsidiaries, sell output to the division, which resells the paper
directly to publishers and printers. The pulp mills adjacent to the paper mills
of this division and the pulp mill owned by an affiliate (see "Forest Products
Affiliates") produce most of the pulp required for use in the paper mills.

     The Gilbert Paper division manufactures premium cotton content business
correspondence papers and premium text and cover papers for printed business
use.  The papers are specified by graphic designers and sold principally through
wholesale paper merchants in the United States and internationally.

     Mead's Specialty Paper division manufactures and sells, primarily through
its own sales force, decorative and overlay laminating papers. The division also
manufactures and sells specialty papers used in industrial applications. The
division's principal customers include manufacturers that serve the building
materials, automotive and furniture industries.

     The Mead Pulp Sales division sells worldwide market pulp manufactured by
Northwood Pulp and Timber Ltd. of Canada, Great Lakes Pulp and Fibre, Inc. in
Menominee, Michigan, and Mead Paper of Escanaba, Michigan and Rumford, Maine.
Mead Pulp Sales also represents MODO Paper AB, of Sweden, and Votorantim
Celulose e Papel, of Brazil,  for the sale of pulp in North America.  Mead Pulp
Sales also sells through its affiliates International Fibre Sales in Europe and
Pulp Asia Ltd. in Japan, and through independent agents in all major pulp
consuming areas of the world.

                                       1
<PAGE>
 
                           Packaging and Paperboard

     The Mead Packaging division designs and produces multiple packaging and
packaging systems primarily for the beverage take-home market.  The division
operates through a network of subsidiaries, affiliates and licensees in the
United States, Canada, Europe, the Far East, Mexico and Latin America.  Demand
for most beverage packaging is seasonal with inventories being built from
November to March for the peak soft drink and beer sales of April through
October.

     Mead Coated Board, Inc., a wholly-owned subsidiary of Mead, operates a
coated paperboard mill near Phenix City, Alabama, sawmills in Cottonton, Alabama
and Greenville, Georgia, and owns various timberlands in Alabama and Georgia.
The subsidiary is engaged primarily in the manufacture of coated natural kraft
products used by the beverage packaging industry and by manufacturers of folding
cartons for soaps, food products, hardware and apparel. The entire output of the
Phenix City mill is sold by Mead Coated Board, Inc. to the Mead Coated Board
division. The division sells approximately 60% of the mill output to the Mead
Packaging division. The remainder is sold to a wide range of domestic and
foreign carton converters. The division's customers are most concerned about
physical strength properties of the paperboard and its quality for
reprographics.

     The Mead Containerboard division sells standard and special purpose
corrugated shipping containers manufactured at eight converting plants located
in the Midwestern and Southeastern regions of the United States from raw
materials received from outside sources and from the division's Stevenson,
Alabama corrugating medium mill. The division also sells corrugating medium from
the Stevenson mill to unaffiliated manufacturers of containers. The division
owns various timberlands in Alabama and Tennessee.

                          Forest Products Affiliates

     Northwood Forest Industries Ltd. ("Northwood"), which is owned 50% by Mead
and 50% by Nexfor Inc., manufactures bleached softwood kraft pulp at its 1,700
short ton-per-day mill in Prince George, British Columbia. The principal markets
for its pulp are in North America, western Europe and the Far East. Lumber and
plywood products are also produced at Northwood's four sawmills and its plywood
plant in British Columbia. Northwood has the annual capacity to produce over one
billion board feet of lumber and 170 million square feet of plywood (3/8-inch
basis). Northwood's solid wood products operations provide about 750,000 tons
(Metric ODT) of wood chips or 65% of the fiber requirements for the pulp mill. A
wood preserving operation also treats lumber and custom treats plywood from
other sources.

     Northwood Panelboard Company ("Panelboard"), a partnership owned 50% by
Mead and 50% by Nexfor Inc., located in Bemidji, Minnesota, has the annual
capacity to produce approximately 400 million square feet of oriented structural
board ("OSB") (3/8-inch basis).

     All of the wood products produced by Northwood and Panelboard are sold
through a subsidiary of Nexfor Inc. primarily in North America with
approximately 15% sold to export markets. All of the market pulp produced by
Northwood is sold by Mead Pulp Sales. Mead has a long-term contract with
Northwood pursuant to which Mead is entitled to purchase such of Northwood's
pulp production as it may require.

                                       2
<PAGE>
 
                          School and Office Products

     The Mead School and Office Products division manufactures and distributes a
line of school supplies (including filler paper, wirebound notebooks, portfolios
and looseleaf binders), a line of office supply products (including envelopes,
filing supplies and vinyl folders and binders), and computer accessories
(including paper based products for computer use, laptop computer cases and
multi-media storage devices).  The division's products are distributed primarily
through mass market retailers, office supply superstores and warehouse clubs.
The school supply segment is highly seasonal with inventories beginning to be
built in the winter and spring for shipment in late spring and summer, while the
home and office products and computer accessories portion of the business is
generally less seasonal in nature.  Manufacturing is done in six facilities and
distributed from seven distribution centers in the United States.
Internationally, one manufacturing facility and distribution center is located
in Canada and one manufacturing facility is located in Mexico.

                                  Timberlands

     Mead obtains most of its wood requirements from private contractors or
suppliers and from Company-owned timberlands.  The annual wood requirement for
Mead's wholly-owned operations in 1998 was approximately 10,800,000 tons, of
which approximately 22% was obtained from timberlands owned or leased by Mead.
The annual wood requirement for Mead's wholly-owned operations expected in 1999
will be approximately the same.

     The approximate annual requirement of wood for both Northwood and
Panelboard is 6,100,000 tons. At Northwood, the majority of wood is obtained
from Crown Lands through various types of cutting rights which are terminable or
renegotiable at the government's initiative and from third parties having
similar cutting rights. At Panelboard, wood is obtained from both private
landowners and various governmental sources (federal, state and county).
 
     As of December 31, 1998, Mead owned or controlled approximately 2,140,000
acres of timberlands in the United States.  Approximately 107,000 acres of land
are controlled by Mead under long-term agreements which expire at different
times through 2027.

                      International Sales and Operations

     Outside of the United States and Canada, Mead and its affiliates operate a
paperboard sheeting facility and are engaged in the manufacture of multiple
packaging systems and folding carton packaging in Europe, Asia and Latin
America.  Mead also has sales subsidiaries, affiliates, agents or distributors
in a number of countries in Europe, Asia, Australia and Latin America.

                                  Competition

     Mead competes on a worldwide basis in its product lines, and the markets in
which Mead sells its products are highly competitive.  Several factors affect
Mead's competitive position, including quality, technology, product design,
customer service, price and cost.  The Paper division competes with numerous
other major paper manufacturers.  The Specialty Paper division competes
primarily with North American and European based decorative laminating
papermakers.  The Gilbert Paper division competes with a number of other
manufacturers of premium cotton, sulfite and recycled papers.  The Coated Board
division competes with other boxboard producers, including manufacturers of all
types of coated recycled boxboard, coated solid bleached sulfate and folding
boxboard.  The Packaging division competes with a number of carton suppliers and
machine manufacturers and 

                                       3
<PAGE>
 
other global systems-based multiple packaging suppliers, as well as suppliers of
other non-boxboard packaging systems. The Containerboard division competes
primarily with container producers, and corrugating and medium producers in
several market areas in the United States. The School and Office Products
division competes with national and regional converters, some with broad product
offerings and others focused on narrow product segments.

                         Employee and Labor Relations

     Mead employs approximately 12,000 persons within the United States and
2,100 persons outside the United States. Approximately 7,200 are production,
maintenance and clerical employees represented by labor unions. Mead's 50% owned
company, Northwood, employs approximately 2,200 persons. Mead and Northwood
together have approximately 50 labor agreements currently in force of which
approximately one-fifth are subject to renegotiation each year.

     Mead's employee relation policies are based on mutual confidence and trust.
All Mead labor contract negotiations during 1998 were concluded without any
strikes.

               Trademarks, Trade Names, Patents, and Franchises

     Mead has a large number of trademarks and trade names under which it
conducts its business, including "Mead," "Mead Papers," "Mead Packaging,"
"Montag," "M and Design," "Trans/Rite," "Trans/Tab," "Duodozen," "Cluster-Pak,"
"Aria," "Cambridge," "Apex," "Info," "Trapper," "Trapper Keeper," "Neatbook,"
"Gilbert," "Oxford," "Gilcrest," "OPAS," "Signature," "CNK," "Five Star," "First
Gear," "Neu-Tech," "Esse," "Organizer," "Spiral," "sig-NATURE," "Management
Series," "Duraline," "Appli," "Duoply," "Techmates," "Hilroy," "CD Escort,"
"Mead Mind Meld," "Fill the Void," "Blue Horse," "Mailbox Collection," "Super
Shades," "Matrix," "Jet-Tech," "Voice," "Prism," "Chief," "Excel," "Mead
Expression," "Moistrite," "PTO," "Publishers Matte," "Vision," "Hobbies &
Ideas," "Clip Note," "DEFENSA," "Multi-Media Escort," "OPTICA," "Scottie,"
"Studio," "Trans Ultra," "Wallaroos," "ULTRATECH," "Laserline," "FLIPDISC,"
"MEDIAZONE," "Fastrak," and many others. Mead also has a great number and
variety of patents, patent rights and licenses relating to its business. While,
in the aggregate, the foregoing are of material importance to Mead's business,
the loss of any one or any related group of such intellectual property rights
would not have a material adverse effect on the business of Mead.

                      Environmental Laws and Regulations

     Mead's operations are subject to extensive regulation by various federal,
state, provincial and local environmental control statutes and regulations.
These regulations impose effluent and emission limitations, waste disposal and
other requirements upon the operations of Mead, and require Mead to obtain and
operate in compliance with the conditions of permits and similar authorizations
from the appropriate governmental authorities.  Mead has obtained, has
applications pending, or is making application for such permits and
authorizations.  Mead does not anticipate that compliance with such statutes and
regulations will have a material adverse effect on its competitive position
since its competitors are subject to the same statutes and regulations to a
relatively similar degree.

     During the past three years (January 1, 1996 - December 31, 1998), Mead
(including its share of Northwood expenditures) constructed air and water
pollution control and other environmental facilities at a cost of approximately
$107 million.  Environmental expenditures in the future are anticipated to
include long-term projects for maintenance and upgrade of wastewater treatment

                                       4
<PAGE>
 
plants, process modifications and air emission controls. Due to changes in
environmental laws and regulations, the application of such laws and regulations
and changes in environmental control technology, it is not possible for Mead to
predict with certainty the amount of capital expenditures to be incurred for
environmental purposes. Taking these uncertainties into account, Mead estimates
that in the next three years it may be required to incur expenditures of
approximately $56 million.

     New regulations under the Clean Air Act and Clean Water Act were announced
by the United States Environmental Protection Agency ("USEPA") in November 1998.
These regulations are designed to reduce air and water discharges of specific
substances from pulp and paper mills in the United States, and to require
installation of additional pollution control equipment based on best available
technology. Mead has included in its capital spending plans amounts necessary to
comply with the new regulations.

     Various Great Lakes states, including Michigan and Ohio, have adopted water
quality regulations consistent with the federal Great Lakes Initiative ("GLI").
Mead does not believe that any significant additional capital expenditures
beyond expenditures stated above will be necessary in the next three years at
Mead's Escanaba facility to comply with the requirements of the Michigan GLI
regulations as finally adopted.  The State of Ohio determined that it would not
apply all GLI regulations to facilities discharging into the Ohio River Basin
for the time being. Mead's Chillicothe, Ohio facility discharges into the Ohio
River Basin.

     Mead believes that most of the earlier expenditures for environmental
control have been beneficial. However, Mead and the trade associations of which
Mead is a member have challenged and will continue to challenge in
administrative and judicial proceedings, federal and state environmental control
regulations which they do not believe are beneficial to the environment or the
public. In some instances, Mead and those trade associations may also seek
legislative remedies to correct unnecessary or impractical requirements of
existing laws.

     Dioxin currently cannot be detected under normal operating conditions in
treated effluents from Mead's three U. S. bleached paper mills. Taking into
account current regulatory efforts and the process and control equipment
installed at Mead's bleached paper mills, management does not believe that any
required actions in response to dioxin concerns will have a material adverse
effect on the Company.

     Mead has been notified by the USEPA or by various state or local
governments that it may be liable under federal environmental laws or under
applicable state or local laws with respect to the cleanup of hazardous
substances at 6 sites currently operated or used by Mead. Mead is also currently
named as a potentially responsible party ("PRP"), or has received third party
requests for contribution under federal, state or local laws with respect to at
least 20 sites sold by Mead over many years or owned by contractors used by Mead
for disposal purposes. Some of these proceedings are described in more detail in
Part I, Item 3, "Legal Proceedings." There are other former Mead facilities and
those of contractors which may contain contamination or which may have
contributed to potential superfund sites but for which Mead has not received any
notice or claim. Mead's potential liability for all these sites will depend upon
several factors, including the extent of contamination, the method of
remediation, insurance coverage and contribution by other PRPs. Although the
costs that Mead may be required to pay for remediation of all these owned and
unowned sites are not certain at this time, Mead has established reserves of
approximately $38 million relating to current environmental litigation and
proceedings which it believes are probable and reasonably estimable. These
reserves were established after considering the number of other PRPs, their
ability to pay their portion of the costs, the volumetric amount, if any, of
Mead's contribution, and other factors. Expenses to be charged to this reserve
are not included in the anticipated capital expenditures for the next three
years

                                       5
<PAGE>
 
stated above. Mead believes that it is reasonably possible that costs associated
with these owned and unowned sites may exceed current reserves by amounts that
may prove insignificant or by as much as approximately $50 million. This
estimate of the range of reasonably possible additional costs is less certain
than the estimate upon which reserves are based.

Item 2. Properties

     Mead considers that its facilities are suitable and adequate for the
operations involved. With the exception of certain warehouses, general offices
and timberlands which are leased, Mead owns all of the properties described
herein. For additional information regarding leases see Note P on pages 45-46.
For additional information concerning Mead's timberlands and properties of
affiliates, see Part 1, Item 1. "Business".

     Mead's corporate headquarters are in Dayton, Ohio and its principal
facilities are at the locations listed:

<TABLE>
<CAPTION>
Business Unit                            Facility Locations                           Principal Use
-------------                            ------------------                           -------------
<S>                                    <C>                                          <C> 
                                                       
Paper                                    Chillicothe, Ohio                            Pulp mill, coated, uncoated and 
                                                                                      carbonless paper mill

                                         Escanaba, Michigan                           Pulp mill, coated paper mill

                                         Indianapolis, Indiana                        Carbonless coating facility
                                                       
                                         Rumford, Maine                               Pulp mill, coated, uncoated and
                                                                                      specialty paper mill
                                                      
Gilbert Paper                            Menasha, Wisconsin                           Cotton and recycled content and
                                                                                      specialty paper mill
                                                                                                             
                                         Appleton, Wisconsin                          Converting and distribution           
                                                                                      center
                                                       
                                                       
Specialty Paper                          South Lee, Massachusetts,                    Decorative laminating and 
                                         Potsdam, New York                            specialty paper mills
                                                       
Packaging                                Lanett, Alabama                              Paperboard packaging, multiple
                                         Atlanta, Georgia                             packaging systems for beverage
                                         Buena Park, California                       and food, packaging machinery
                                         Chicago, Illinois                            manufacturing or repair
                                         Ajax, Ontario, Canada                        facilities
                                         Chateauroux, France         
                                         Trento, Italy               
                                         Roosendaal, The Netherlands 
                                         Trier-Ehrang, Germany       
                                         Bristol, England            
                                         Shimada, Japan              
                                         Bilbao, Spain               
                                                     
                                                     
Containerboard                           8 plants within the United                   Corrugated container
                                         States in midwest and                        manufacturing facilities
                                         southern regions            
                                                     
                                         Stevenson, Alabama                           Corrugating medium mill
</TABLE>

                                       6
<PAGE>
 
<TABLE>
<CAPTION>
Business Unit                         Facility Locations                              Principal Use
-------------                         ------------------                              -------------
<S>                                   <C>                                             <C> 
Coated Board                          Phenix City, Alabama                            Coated paperboard mill, sheeting 
                                      Venlo, The Netherlands                          facilities and sawmills
                                      Cottonton, Alabama
                                      Greenville, Georgia
 

School and Office Products            6 manufacturing and 7 distribution              Home, office and school products
                                      locations throughout the United States,         manufacturing and distribution 
                                      one manufacturing and distribution              facilities 
                                      location in Toronto, Ontario, Canada and
                                      one manufacturing location in Nuevo
                                      Laredo, Mexico
</TABLE> 


Item 3. Legal Proceedings

     In March 1991, Mead was served with a complaint entitled Beazer East Inc.
                                                              ---------------
v. The Mead Corporation, C.A. No. 91-0408, filed in the United States District
-----------------------
Court for the Western District of Pennsylvania. The complaint alleges that Mead
is liable to Beazer for contribution for past and future environmental
remediation costs to be incurred by Beazer as a result of any corrective
measures required at the Woodward Facility located in Dolomite, Alabama. Mead
acquired the Woodward Facility by merger in 1968, and in 1974 sold it to
Koppers, Inc., which was later acquired by Beazer. In May, 1997, the magistrate
judge in the proceeding held a hearing to determine the appropriate equitable
factors to be applied in an allocation of liability among the parties. No
rulings on issues raised in the hearing have been made, and proceedings pend in
court regarding Beazer's contribution claim. Although the extent of
contamination and the method of remediation to be required are not known at this
time, based on information currently available to Mead, after considering
established reserves, rights to contribution and potential insurance coverage,
Mead does not expect this proceeding will have a material adverse effect on the
financial condition or results of operations of the Company.

     The Tennessee Department of Environment and Conservation ("TDEC") advised
Mead in September 1991 that a closed coke manufacturing facility located in
Chattanooga, Tennessee (the "Coke Plant Site") is a hazardous substance site
within the meaning of the Tennessee Hazardous Waste Management Act, and that
Mead may be a potentially responsible or liable party. In 1994 Mead undertook a
removal action at the closed coke plant site, consisting of demolition of
structures, removal of asbestos, control of surface water ponding and repairs to
fencing. Mead is engaged in discussions with TDEC concerning the scope of any
additional remedial actions that may be required for the site. The coke plant
was owned by the Defense Plant Corporation during World War II and sold by the
War Assets Administration in 1946. Woodward Iron Company, formerly a division of
Mead, acquired the coke plant in 1964, and Mead sold the coke plant site to
third parties in 1974. Although the extent of contamination and the possible
methods of remediation are not known at this time, based on information
currently available to Mead, after considering established reserves, rights to
contribution and potential insurance coverage, Mead does not believe this
proceeding will have a material adverse effect on the financial condition or
results of operations of the Company.

     In June 1996, USEPA announced plans to undertake an interim removal action
involving the excavation and treatment/disposal of bulk tar deposits located in
or near the Chattanooga Creek and certain waste piles located near the Coke
Plant Site. Costs of the proposed removal action were estimated by USEPA at the
time to be approximately $5.1 million. In July 1996, several PRPs, including
Mead and the U.S. Department of Defense, received special notice letters from
USEPA

                                       7
<PAGE>
 
advising them of their potential liability for the removal action. In December
1996, USEPA issued Unilateral Administrative Orders under Section 106 of CERCLA
to Mead and two other private parties. In January 1997, Mead indicated its
intent to not comply with the 106 Order. Preliminary analyses by USEPA have
indicated that dumping in Chattanooga Creek occurred when the coke plant was
doubled in size to meet World War II government requirements. A party who,
without sufficient cause, refuses to comply with an order issued under Section
106 of CERCLA may be subject to fines of up to $27,500 per day and punitive
damages in an amount up to three times the costs incurred by the USEPA as a
result of the failure to comply with such order. Mead believes, based on its
review of the facts and the law applicable to the matter, including the absence
of findings by the USEPA, that it had sufficient cause for its decision not to
comply with the 106 Order. However, if the USEPA decides to bring an enforcement
action against Mead as a result of its failure to comply with the 106 Order,
there can be no assurance as to the outcome of such action. In the summer of
1997, USEPA hired contractors and commenced implementation of the interim
removal action. USEPA completed the removal action in November 1998. More
contamination than expected was discovered and excavated. Costs of the removal
action have not been finally determined, but USEPA has estimated that project
costs will total between $12 million and $16 million.

     Mead filed a Complaint in the Circuit Court for Jefferson County, Alabama
(Case No. CV9705117) against a number of insurance companies who had provided
insurance to the Woodward Iron Company and/or Mead facilities operated under the
former Industrial Products division. The Complaint seeks a declaratory judgment
and damages for the insurers' failure to provide a defense and coverage for
claims in Beazer East Inc., the Coke Plant Site and Chattanooga Creek
proceedings.

     Mead is a defendant in a patent infringement proceeding entitled Riverwood
                                                                     ----------
International Corporation v. The Mead Corporation pending in the United States
-------------------------------------------------
District Court for the Northern District of Georgia (Civil Action No. 1-94-CV-90
CAM) filed by Riverwood International Corporation. On March 9, 1998 a Special
Master's decision was entered in the proceeding which held that Riverwood's '806
patent was invalid. Riverwood filed objections to the Special Master's Order on
the issue of invalidity. The District Court heard the objections on October 27,
1998 and reversed the Special Master's conclusion of invalidity on January 13,
1999. The order of the District Court will be appealed to the Court of Appeals.
A second patent infringement proceeding against Mead filed by Riverwood with the
same title and in the same court (Civil Action No. 97-CV-2767) has been stayed
pending the outcome of the case involving the '806 patent. The second proceeding
involves Riverwood's '789 and '361 patents. Mead believes these proceedings will
not have a material adverse effect on the liquidity, financial condition or
results of operation of the Company.

     Additional information is included in Part I, Item 1, "Business--
Environmental Laws and Regulations," and Note Q on page 46.

     Mead is involved in various other litigation and administrative proceedings
arising in the normal course of business, which, in the opinion of management,
after considering established reserves, will not have a material adverse effect
on the financial condition, liquidity or results of operations of Mead.

Item 4. Submission of Matters to a Vote of Security Holders

     Not applicable.

Executive Officers of the Company

     The Executive Officers of Mead as of February 1, 1999, their ages,
positions and offices with Mead, and the principal occupation (unless otherwise

                                       8
<PAGE>
 
stated, position is with Mead) of such Executive Officers during the past five
years are as follows:


<TABLE>
<CAPTION> 

         Name            Age               Position and Offices
         ----            ---               --------------------
<C>                      <C>        <S>  
                    
William R. Graber        55         Vice President and Chief Financial Officer 
                                    since December, 1993.
    
Elias M. Karter          58         Executive Vice President since April, 1996; 
                                    prior to that Vice President, Operating
                                    Officer since July, 1994; prior to that
                                    Vice President, Manufacturing & Technology.
 
Raymond W. Lane          50         Executive Vice President since April, 1996;
                                    prior to that Vice President, Operating
                                    Officer since July, 1994; prior to that
                                    President of Mead School and Office
                                    Products Division.

Wallace O. Nugent        60         Vice President, Purchasing and Logistics.
 
Thomas E. Palmer         59         Vice President, General Counsel and 
                                    Secretary since November, 1996; prior to
                                    that Vice President and General Counsel.

William B. Plummer       40         Vice President, Strategy and Planning since 
                                    July, 1998; prior to that Treasurer since
                                    February, 1997; prior to that Vice
                                    President, Equity Capital Group since May,
                                    1995 with General Electric Company; prior
                                    to that Business Analyst, Corporate
                                    Financial Planning since February, 1994 
                                    with General Electric Company.
                                                  

A. Robert Rosenberger    54         Vice President, Human Resources since June,
                                    1997; prior to that Vice President of Human
                                    Resources of Mead Packaging Division from   
                                    August, 1994; prior to that Vice President
                                    of Human Resources of Mead Containerboard
                                    Division.



Jerome F. Tatar          52         Director; Chairman of the Board, Chief
                                    Executive Officer and President since
                                    November, 1997; prior to that President and
                                    Chief Operating Officer since April, 1996;
                                    prior to that Vice President, Operating
                                    Officer since July, 1994; prior to that
                                    President of Mead Fine Paper Division.

</TABLE>

All Executive Officers of Mead are elected annually by the Board of Directors.

                                       9
<PAGE>
 
                                 PART II


Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters

     Mead's Common Shares are listed on the New York, Chicago and Pacific Stock
Exchanges, trading under the symbol "MEA."  Information on market prices and
dividends is set forth below:
<TABLE>
<CAPTION>
 
 
MARKET PRICES PER COMMON SHARE
------------------------------ 
                                               1998                 1997*
                                               ----                 ----
                                         High        Low        High      Low  
                                         ----        ---        ----      ---  
<S>                                    <C>         <C>        <C>       <C>    
                                                                               
First quarter                          $37.312     $27.062    $30.875   $27.187
Second quarter                          37.125      28.437     33.812    24.875
Third quarter                           33.563      25.938     37.687    30.875
Fourth quarter                          33.500      27.000     37.468    27.187 
</TABLE> 

 
<TABLE> 
<CAPTION> 
DIVIDENDS PAID PER COMMON SHARE
-------------------------------
                                                1998                 1997*
                                                ----                 ----
<S>                                             <C>                  <C> 
 
First quarter                                   $.16                 $.15  
Second quarter                                   .16                  .15  
Third quarter                                    .16                  .15  
Fourth quarter                                   .16                  .16  
                                                ----                 ----   

Year                                            $.64                 $.61
                                                ====                 ==== 
</TABLE>


       *Numbers restated to reflect two-for-one stock split on December 1, 1997.
 
        The number of Common shareowners of record as of February 23, 1999, was
54,100.  See Note H on page 36 for information regarding the amount of retained
earnings available for dividends.

                                       10
<PAGE>
 
Item 6.  Selected Financial Data
Five-Year Data on Operations, Liquidity, Financial Condition and Capital
Resources
(All dollar amounts in millions, except per share amounts)

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Year Ended December 31                 1998       1997       1996       1995       1994
---------------------------------------------------------------------------------------
<S>                                <C>        <C>        <C>        <C>        <C>
Operations:
  Net sales                        $3,772.2   $3,745.8   $3,303.9   $3,402.8   $3,012.0
  Earnings from continuing
   operations                         140.1      163.0      183.8      333.9       99.7
  Earnings per common share
   from continuing operations
   - assuming dilution                 1.34       1.53       1.73       3.02        .84
Liquidity:
  Working capital                     406.9      312.7      280.1      401.2      608.3
  Current ratio                         1.6        1.5        1.4        1.5        1.6
Assets:
  Property, plant and
   equipment - net                  3,372.7    3,273.8    3,084.6    2,328.3    2,272.9
  Total assets                      5,142.2    5,152.4    4,905.9    4,284.0    4,762.3
Capital:
  Borrowed capital -
   long-term debt                   1,367.4    1,428.0    1,239.7      694.8      957.7
  Equity capital                    2,252.0    2,288.5    2,246.4    2,160.2    2,182.6
                                   ----------------------------------------------------
   Total capital                   $3,619.4   $3,716.5   $3,486.1   $2,855.0   $3,140.3
Borrowed capital as a percent
 of total capital                      37.8%      38.4%      35.6%      24.3%      30.5%
Cash dividends per common share    $    .64   $    .61   $    .59   $    .55   $    .50
</TABLE>

                                       11
<PAGE>
 
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations


                                 REVIEW OF OPERATIONS
                                 --------------------


OVERVIEW OF 1998

Sales revenue of $3.772 billion was essentially unchanged from the level of
1997 as higher shipments of corrugating medium, coated paperboard and packaging
offset lower sales volume of paper and school and office products. Average
selling prices for most grades of paper and paperboard were relatively unchanged
from the prior year, though prices for many products declined during the second
half of 1998. Earnings from continuing operations were $140.1 million in 1998
compared to $163.0 million in 1997. The decrease was primarily a result of
charges for special items. Earnings from continuing operations before special
items were slightly higher than 1997.

Within Mead's paper operations, sales volume declined slightly from 1997 levels,
and prices weakened in the second half of the year as reported sales of imported
paper into the U.S. increased. The Paper segment's earnings improved as the
company's three major mills operated well. Productivity improved, although gains
were limited by second half production downtime taken to manage inventory
levels. Growth in sales volume continued in industrial and decorative specialty
paper grades due to increased demand and the purchase of a small specialty paper
mill early in the second quarter.

In packaging and paperboard operations, sales and earnings improved at Mead
Packaging as a result of strong volume growth and productivity gains at its
converting operations. At the Coated Board division, results were unchanged from
last year as increased sales volume of coated paperboard and improved mill
productivity were offset by weaker pricing in the division's sawmill business.
At the Containerboard division, the final phase of the Stevenson, Alabama, mill
expansion was completed during the year. Division results improved slightly on
increased sales volume and higher average selling prices for the year.

For the School and Office Products division, sales and earnings declined as
lower sales volume offset the results of slightly improved mix and margin rates.
The division added to its product line with the purchase of a small company late
in the year that sells computer accessories.

At Mead's primary investee, Northwood, results were lower than in 1997 as weak
markets for pulp and wood products led to lower prices for lumber, plywood and
pulp. Northwood's lumber operations took downtime in the second half of the year
to reduce inventory. Operating performance at the pulp mill improved during the
year and shipments of pulp increased.

Review of Operations
<TABLE> 
<CAPTION> 

Earnings Per Share Analysis
----------------------------------------------------------------------
                                     1998          1997         1996
----------------------------------------------------------------------
<S>                                  <C>          <C>          <C> 
Continuing operations before
 special items                       $1.55        $1.53        $1.73
Special items                         (.21)
                                     -----        -----        -----
Continuing operations                 1.34         1.53         1.73
Discontinued operations               (.20)        (.12)         .11
                                     -----        -----        -----
Net earnings - assuming
 dilution                            $1.14        $1.41        $1.84
                                     =====        =====        =====
----------------------------------------------------------------------
</TABLE>

                                       12
<PAGE>
 
DISCONTINUED OPERATIONS AND SPECIAL ITEMS
-----------------------------------------

During 1998, Mead undertook a number of initiatives that will, to varying
degrees, impact the future direction of the company, and recorded the write-down
of several assets. The most significant of these initiatives was selling the
Zellerbach distribution segment. The operation did not meet Mead's earnings and
growth expectations and was not viewed as strategic to the future success of
Mead's core businesses of coated and specialty papers, packaging and paperboard,
and school and office products. An agreement to sell substantially all of the
operations for approximately $263 million was signed in the second quarter. In
late December, Mead sold a warehouse formerly used in that business for
approximately $25 million. For 1998, Mead recorded after-tax charges of $20.4
million or 20 cents per share related to the Zellerbach operation and its sale.

Special items included asset write-downs, asset sales, and organizational
changes and related workforce reductions. For asset write-downs, the company
recorded a pretax charge of $37.7 million ($26.8 million after tax) or 25 cents
per share primarily in cost of sales. The write-downs, which affected each of
Mead's three business segments, primarily include:

 .   a reserve for stores and supplies inventory ($10.4 million pretax) recorded
    upon completion of a study to determine the future utility of obsolete and
    excess replacement parts, facilitated by a new inventory management system;

 .   the write-off of $10.4 million of capitalized software made obsolete by
    Mead's decision to implement an enterprise resource planning computer
    system;

 .   a charge of $8.2 million for Mead's Japanese packaging operation, primarily
    a write-down of certain inventory, and to reflect the impairment of
    property, plant and equipment, and goodwill resulting from the deteriorating
    economic environment in Japan, as well as poor operating performance;

 .   the write-off and disposal of $4.6 million of certain plant equipment that
    was replaced by new equipment.


The asset sales, the effects of which are reflected in other revenues, occurred
in the fourth quarter and resulted in pretax gains of $28.3 million ($17.8
million after tax) or 17 cents per share. Proceeds from the sales aggregated to
$63.3 million. Assets sold included excess Michigan timberlands, which comprised
part of Mead's paper segment; the ink business of Mead's packaging and
paperboard segment; and a Tennessee mill site, considered a corporate asset.
These assets were not critical to the future operations of Mead's core
businesses.

In the third quarter of 1998, the company adopted a plan to make organizational
changes and reduce its workforce, recording a charge of $22 million ($13.8
million after tax) or 13 cents per share for employee severance and related
costs in selling and administrative expenses. The plan related to 318 people,
mostly salaried, from throughout the company's domestic operations, and was
communicated to employees in the third quarter. The charge covered expected
severance payments and medical, dental and other benefits. Through the end of
1998, 202 people have left the company, and the remainder are expected to leave
before the end of the third quarter of 1999. Approximately $10 million of the
reserve remains, which will be reduced by cash payments made to or on behalf of
the employees who will have left the company.

                                       13
<PAGE>
 
                                     PAPER
<TABLE>
<CAPTION>

-------------------------------------------------------------
Segment Summary (in millions)      1998       1997       1996
-------------------------------------------------------------
<S>                            <C>        <C>        <C>


Sales                          $1,795.6   $1,797.8   $1,434.0

Earnings before
   income taxes and
   special items                  222.7      195.6      194.8

Special items                     (16.4)
                               --------   --------   --------
Earnings before
  income taxes                 $  206.3   $  195.6   $  194.8
                               ========   ========   ========
</TABLE>
-------------------------------------------------------------

Sales revenue in Mead's paper segment was essentially unchanged from 1997.
Earnings before special items increased by 14% over 1997 primarily as a result
of improved operating performance.

Demand for coated and uncoated papers strengthened in 1997, as shipments
increased and prices for most paper grades began to strengthen by the second
half of the year. Prices continued to improve into the first quarter of 1998.
Then, as markets weakened in Asia, reported imports into the U.S. of coated and
uncoated papers increased, and selling prices declined by the second half of the
year. By the end of 1998, selling prices for coated and uncoated papers had
fallen below prior year-end levels. For the year, average prices for coated and
uncoated papers were only slightly higher than in 1997. Average prices for
carbonless papers in 1998 were slightly below 1997 and 1996 levels.

Mead Paper's mills operated well in 1998 and continued to improve productivity
by managing costs and improving sales mix. Inventories increased in most grades
from the prior year levels as a result of strong operating performance and lower
sales volume, despite more than 40,000 tons of downtime taken in the second half
of the year.

In 1997, sales revenue increased over 1996, driven primarily by the late 1996
acquisition of the Rumford, Maine, mill. Earnings were slightly higher in 1997
compared to 1996 as a result of increased volume, despite lower selling prices.

Mead Paper
----------

Mead Paper manufactures coated papers for use by book and magazine publishers
and catalog and commercial printers, carbonless copy papers and uncoated papers
for business and specialty uses. The division, which operates three mills
located in Chillicothe, Ohio; Escanaba, Michigan; and Rumford, Maine; was formed
in 1998 by combining the Fine Paper and Publishing Paper divisions.

Division sales revenue declined slightly from 1997 as a result of lower volume,
which was partially offset by slightly higher average selling prices. Earnings
in 1998 increased over 1997 and 1996 as a result of improvements in
productivity, primarily through improved cost control. The paper mills operated
well, although overall productivity improvement was hindered by market-related
downtime taken in coated paper at the Maine and Michigan mills in the second
half of the year. As a result of the downtime, overall paper production was
lower than in 1997. Despite the downtime, finished inventories increased during
the year in most grades as a result of strong operating performance and
declining sales volume in the second half of the year. Sales volume of
carbonless paper, which decreased slightly in 1997, continued to decrease in
1998, consistent with an overall decline in the market for multi-part business
forms. During the year, the division improved operating efficiencies and
manufacturing integration among its

                                      14
<PAGE>
 
three mills, and reduced overhead costs and staff levels when it formed the
combined division. The division also announced its intention to sell a sawmill,
and it sold related timberlands.

In 1997, the division's sales revenue increased from 1996 as a result of
additional sales volume provided from the Rumford mill during the first full
year of Mead's ownership. Division earnings in 1997 were about even with the
level of earnings in 1996 as a result of lower selling prices.

Mead Specialty Paper
--------------------

Mead Specialty Paper manufactures a variety of decorative and overlay papers for
laminates used in furniture, flooring, countertops and cabinets. It also
produces specialty grades for various industrial and automotive applications.

The division's sales and earnings increased in 1998 over 1997 and 1996 levels.
The increase in sales was driven by the addition of shipments from the Potsdam,
New York, mill acquired in the second quarter of 1998 and higher production and
shipments from the division's South Lee, Massachusetts, mill. Productivity
improvements driven by strong operating performance, higher volumes, lower
variable costs and improved sales mix led to the increase in earnings. Demand
for most of the division's specialty grades was strong in 1998.

In 1997, sales and earnings increased over 1996 as a result of higher sales
volume and stronger sales mix. Improved manufacturing yields and stronger
markets led to higher overall production volumes.

Gilbert Paper
-------------

Gilbert Paper produces high-quality communication papers, including cotton-
content stationery, text and cover papers and specialty papers.

Division operating results decreased from 1997 and 1996 levels as a result of
lower sales volume. Shipments increased through merchant distribution channels
over 1997 and 1996, but the increase was offset by decreases in retail and
export sales volume. Lower shipments reflected weak market conditions. Average
prices were unchanged from 1997. Finished goods inventory declined during the
year as a result of reduced operating schedules and the sale of substandard
inventory.

In 1997, sales and earnings decreased from 1996 as a result of lower sales
volume and lower selling prices.


                           PACKAGING AND PAPERBOARD
<TABLE>
<CAPTION>
-------------------------------------------------------------
Segment Summary (in millions)      1998       1997       1996
-------------------------------------------------------------
<S>                            <C>        <C>        <C>
Sales                          $1,494.2   $1,431.8   $1,371.4

Earnings before
   income taxes and
   special items                  153.8      129.6      138.6

Special items                     (11.3)
                               --------   --------   --------
Earnings before
  income taxes                 $  142.5   $  129.6   $  138.6
                               ========   ========   ========
</TABLE>
-------------------------------------------------------------

Sales for the packaging and paperboard segment increased 4% in 1998 on higher
sales volume of coated paperboard, corrugating medium and beverage packaging.
Earnings before special items increased 19% over 1997, primarily as a result of
continued growth in multiple beverage packaging.

                                      15
<PAGE>
 
Prices for corrugating medium declined throughout much of 1998 as a result of
increased supply in domestic markets. By the end of 1998, prices for medium were
below the level of year-end 1997. For the year, medium prices averaged higher
than in 1997. Prices for containers were relatively stable and averaged higher
than in 1997. In the market for coated paperboard sold to folding carton
manufacturers, average coated paperboard prices were slightly higher.

In 1997, sales in the segment increased over 1996 on higher sales volume of
coated paperboard, medium and beverage packaging. Earnings in the segment were
lower as a result of lower prices for medium and coated paperboard.

Mead Coated Board
-----------------

Mead Coated Board manufactures coated unbleached kraft paperboard for use in
multiple beverage packaging and folding cartons. Customers include folding
carton manufacturers in North America and Europe and Mead Packaging's worldwide
beverage packaging business.

Revenue from external sales of the division were slightly lower than the level
of 1997. Earnings were unchanged from 1997 as increased sales volume of coated
paperboard and improved mill productivity were offset by weaker results in the
division's sawmill operations. A weak lumber market in 1998 resulted in lower
selling prices, higher costs and decreased sawmill production. In 1998,
shipments of coated paperboard increased to Mead Packaging for multiple beverage
packaging applications. Shipments to folding carton converters declined slightly
during the year. Prices for coated paperboard were slightly higher than in 1997
and lower than 1996 levels. Production of coated paperboard at the Mahrt mill in
Alabama increased over 1997 and 1996. Inventories at year-end 1998 were slightly
higher than at the end of 1997, but below the level of year-end 1996.

In 1997, sales increased over 1996 on higher sales volume of coated paperboard.
Earnings were slightly lower than in 1996 as increased paperboard shipments,
improved mill productivity and higher prices at the division's sawmill
operations were offset by lower selling prices for paperboard and the negative
impact of the strong U.S. dollar on sales in Europe.

Mead Packaging
--------------

Mead Packaging is a leading worldwide supplier of multiple beverage packaging
and packaging systems. It also provides multiple packaging for food and other
products. Customers include large and small brewers, soft drink bottlers, and
food and other consumer products companies.

Division sales increased over 1997 driven by higher sales volume. Earnings
increased over 1997 as a result of strong volume in North America, slightly
higher selling prices and gains in productivity from improved cost control.
Carton volume growth continued in North America, Europe, Latin America and the
Asia Pacific region. The division continued worldwide placement of new modular
beverage packaging systems. During the year, the division installed new printing
equipment at its converting facilities in Lanett, Alabama, and Buena Park,
California, and also sold its ink products business.

In 1997, division earnings increased over 1996 as a result of higher sales
volume of cartons and improved operating performance from converting operations.

Mead Containerboard
-------------------

Mead Containerboard produces corrugating medium used in shipping containers and
operates eight corrugated container plants.

Sales revenue increased over 1997 as shipment volume of corrugating medium
continued to increase at the Stevenson, Alabama, mill. Operating results

                                      16
<PAGE>
 
improved slightly over 1997, primarily as a result of increased volume and
higher average selling prices.  Prices for medium declined throughout 1998 and
at year-end were about 20% below year-end 1997.  Production volume of medium
increased over 1997 and 1996, including production of lightweight and ultra-
lightweight medium for this emerging and growing segment of the market.  Mead's
sales in that emerging segment continued to grow in 1998.  Sales volume of
finished containers increased over 1997 and 1996.

During the year, construction was completed on the expansion of the #2
paperboard machine and an upgrade to the environmental systems at the mill.  The
machine expansion was completed on time at mid-year.  A difficult start-up for
the recovery and chemical conversion systems led to higher than expected
operating costs.  In the second half of the year, the division made progress
toward improving the operations of these systems.  The division reorganized its
operations during the year to reduce selling and administrative costs and
improve operating efficiencies.

In 1997, sales revenue increased slightly over 1996 on higher sales volume.
Operating results were significantly lower than in 1996 as a result of much
lower selling prices for medium.

                          SCHOOL AND OFFICE PRODUCTS

<TABLE>
<CAPTION>
     -------------------------------------------------------
     Segment Summary (in millions)  1998      1997      1996
     -------------------------------------------------------
     <S>                          <C>       <C>       <C>
     Sales                        $482.4    $516.2    $498.5
     Earnings before
       income taxes and
       special items                47.4      57.3      57.9
     Special items                  (4.6)
                                  ------    ------    ------
     Earnings before
       income taxes               $ 42.8    $ 57.3    $ 57.9
                                  ======    ======    ======
     -------------------------------------------------------
</TABLE>

School and Office Products is a leading converter and distributor of school
supplies.  It also provides stationery products and computer accessories for
home and office use and is an industry leader in fashion and product design.

Sales revenue declined by 7% in 1998 compared to 1997 as a result of lower sales
volume.  Earnings were below the level of 1997 and 1996 as lower overall sales
volume more than offset slightly improved mix and margin rates.  Shipments were
lower in 1998 due to reduced sales in commodity products and an increase by
retailers in the direct sourcing of some school and office products from
offshore suppliers.  To better manage inventory levels, the division closed a
distribution center and cut back production at its converting facilities.
During the fourth quarter of 1998, the division added to its office products
line by acquiring the assets of Creative Point, a company that designs and
markets accessories for multimedia, consumer electronic and computer products.

In 1997, sales revenue increased over 1996 on an increase in sales volume.
Earnings were essentially unchanged from the level of 1996 as a result of lower
selling prices for paper-based products and slightly lower margin rates.

INVESTEES
---------

Mead's primary investees are Northwood Forest Industries Limited, a large
producer of northern bleached softwood kraft (NBSK) pulp and solid wood products
in British Columbia, Canada, and Northwood Panelboard Company, an oriented
structural board (OSB) mill in Bemidji, Minnesota.  Both are 50%-owned by Mead
and Nexfor Inc.  Pulp from Northwood is sold globally by Mead Pulp Sales.  The
sale of wood products, including lumber, plywood and OSB, is managed by a

                                       17
<PAGE>
 
subsidiary of Nexfor Inc.  Additionally, Mead has a 30% ownership in a limited
partnership, which operates the power cogeneration facility located at the
Rumford, Maine, paper mill.  Mead's share of losses from all investees in 1998
was $1.8 million, a decrease from earnings of $8.9 million in 1997 and $4.3
million in 1996.

Sales revenue for Northwood declined in 1998 from the levels of 1997 and 1996 on
lower prices for lumber, plywood and pulp.  Shipments of pulp increased during
the year.  The decrease in earnings from Northwood was a result of lower prices
for lumber, plywood and pulp, partially offset by higher prices for OSB, higher
shipments of pulp, favorable Canadian dollar exchange rates and improved
operating performance.

The pulp mill and OSB operations had strong production performance in 1998, both
setting daily production records during the year.  Northwood also made progress
in reducing overhead costs as part of its margin improvement program.  In the
second half of the year as markets weakened, Northwood took downtime at its
lumber operations, reducing capacity by 145 million board feet, or about 26% of
its capacity, for the last six months of the year.

During 1998, worldwide demand declined for chemical grade market pulp, primarily
as a result of much weaker markets in Asia.  This decline in demand and a slight
increase in worldwide capacity led to a weakening in pulp prices.  The domestic
list price of pulp which peaked near $1,000 per metric ton in late 1995, has
declined for the last three years and averaged $545 per metric ton in 1998.

In the lumber market, shipments were adversely affected by weak markets in Asia
and the continued reduction of exports into the U.S. due to limitations imposed
by the Canadian/U.S. Softwood Lumber Agreement.  Lumber prices fell sharply in
the fourth quarter of 1997 and remained weak for most of 1998.  Strong U.S.
housing starts led to increased consumption of panelboard in 1998.  Plywood
prices were steady, though weaker than in 1997.  OSB prices rebounded in mid-
1998 from very low levels in 1997.

SELLING AND ADMINISTRATIVE EXPENSES
-----------------------------------

As a percentage of sales, selling and administrative expenses were 11.2% in 1998
compared with 10.8% in 1997 and 11.9% in 1996.  In dollar terms, these expenses
rose by 4.4% compared to a 2.8% increase from 1996 to 1997.  The largest single
driver of the increase in 1998 was $22 million in expenses associated with
certain organizational changes and a related reduction in Mead's workforce.
Excluding this charge, these expenses were under the 1997 level, driven by
reduced administrative expenses.  Some of the 1997 dollar increase over 1996 was
attributable to operations at the Rumford, Maine, paper mill which was acquired
late in 1996, while the rest was the result of inflation.  All of the 1997
dollar increase was driven by higher selling expenses, as administrative
expenses actually declined slightly from 1996 levels.

INTEREST AND DEBT EXPENSE
-------------------------

The increase in interest and debt expense for 1998 versus 1997 was due to
slightly higher average debt levels during 1998.  The 1997 increase over 1996
was due to significantly higher average debt levels in 1997 than in 1996.
Mead's interest and debt expense increased to $109 million from $98 million and
$58 million in 1997 and 1996, respectively.  Mead's interest rates were not
significantly different during the three years.

                               FINANCIAL REVIEW
                               ----------------

In 1998, Mead generated over $342 million in cash from selling its Zellerbach
distribution segment and from several asset sales.  Mead's cash flows from

                                       18
<PAGE>
 
operating activities in 1998 were slightly higher than those of 1997 and about
equal with those of 1996.

During 1998, Mead continued its stock repurchase program, acquiring 2.6 million
shares for $83 million.  Share repurchases in 1997 were 2.1 million shares for
$70 million, and 2.2 million shares for $60 million in 1996.  Funds for the 1998
repurchase came from operating activities and the sale of Zellerbach.
Repurchases for 1997 were funded by general operations, while 1996 funding came
primarily from remaining proceeds of a late 1994 asset sale.

Mead's total long-term debt (including current maturities) at year-end 1998 was
$1.375 billion, down from $1.430 billion in 1997 and up from $1.255 billion in
1996.  Some of the proceeds of the Zellerbach sale were used to reduce overall
debt levels in 1998.  During 1998, Mead refinanced some of its borrowings
related to the project at the Stevenson, Alabama, mill.  Mead's 1997 levels of
capital spending and stock repurchases were the primary drivers of the $175
million increase in borrowings over 1996.  Mead's total debt as a percentage of
total capital was 37.9% at the end of 1998 compared with 38.5% at the end of
1997 and 35.8% at the end of 1996.  The percentage may change, as warranted, by
borrowings to fund strategic opportunities.

Additional financing capability is afforded by a $500 million bank credit
agreement which expires October 2002 and by a shelf registration on file with
the Securities and Exchange Commission under which the Company could offer up to
$300 million of debt securities.  The bank credit agreement supports $75 million
of the Company's capital lease obligations, leaving $425 million additional that
can be borrowed. Up to $154 million of medium-term notes are authorized to be
issued as a part of that registration statement.

At the end of 1998, Mead paid a fixed or capped rate on 79% of its debt and paid
a floating rate of interest on the remainder.  A change of 1% in the floating
rate, on an annual basis, would result in a change of 2 cents in earnings per
share.  The estimated market value of long-term debt, excluding capitalized
leases, was $72 million more than the book value at the end of 1998.

Working capital at the end of 1998 was $407 million versus $313 million and $280
million at the end of 1997 and 1996, respectively.  The 1998 increase from 1997
was primarily attributable to growth in inventory and cash balances.  Mead's
current ratios at the end of 1998, 1997 and 1996 were 1.6, 1.5 and 1.4,
respectively.

Mead's inventory levels rose to $480 million in 1998 up from $424 million in
1997 and $436 million in 1996.  The growth in 1998 was primarily the result of
inventory builds in Mead's paper operations.  The replacement values of
inventories exceeded their LIFO value by $175.6 million at the end of 1998.
Adjusted for LIFO, Mead's current ratio would be 1.7 at year-end.

CAPITAL SPENDING

Capital spending at Mead decreased to $384 million in 1998, down from $437
million in 1997 and $429 million in 1996.  The largest single project in 1998
was the completion of a $224 million expansion and upgrade at the Stevenson,
Alabama, corrugating medium mill.  This second phase at the mill added virgin
pulp-making capabilities, a wood fuel boiler and additional dryers to the
machine.  This expansion increased the annual capacity of the mill to 815,000
tons up from 640,000 tons.

Mead expects capital spending in 1999 to be in the range of $250 - $300 million,
and expects to fund this spending from 1999 operations, although some external
borrowing may be needed.

                                       19
<PAGE>
 
ENVIRONMENTAL PROCEEDINGS

Mead has been notified by the United States Environmental Protection Agency
("USEPA") or by various state or local governments that it may be liable under
federal environmental laws or under applicable state or local laws with respect
to the cleanup of hazardous substances at six sites currently operated or used
by Mead.  Mead is also currently named a potentially responsible party ("PRP"),
or has received third party requests for contributions under federal, state or
local laws with respect to at least 20 sites sold by Mead over many years or
owned by contractors used by Mead for disposal purposes.  There are other former
Mead facilities and those of contractors that may contain contamination or may
have contributed to potential Superfund sites but for which Mead has not
received any notice or claim.  Mead's potential liability for all these sites
will depend upon several factors, including the extent of contamination, the
method of remediation, insurance coverage and contribution by other PRPs.
Although the costs that Mead may be required to pay for remediation of all these
owned and unowned sites are not certain at this time, Mead has reserves of $38
million relating to current environmental litigation and proceedings that it
believes are probable and reasonably estimable.

Mead believes that it is reasonably possible that costs associated with these
sites may exceed current reserves by an amount that could range from an
insignificant amount to as much as $50 million.  The estimate of this range is
less certain than the estimates upon which reserves are based.

In April 1998, USEPA promulgated new regulations under the Clean Air Act and
Clean Water Act (the "Cluster Rules") designed to reduce air and water
discharges of specific substances from U.S. paper and pulp mills.  Mead has
included in its capital spending plans amounts necessary to comply with the new
regulations.  Various Great Lakes states in 1997, including Michigan and Ohio,
adopted state regulations consistent with the federal Great Lakes Initiative
(GLI).  Mead does not believe that any significant additional capital
expenditures beyond expenditures previously stated will be necessary in the next
three years at Mead's Escanaba facility to comply with the requirements of the
Michigan GLI regulations as finally adopted.  The State of Ohio determined that
it would not apply all GLI regulations to facilities discharging into the Ohio
River Basin, for now.  Mead's Chillicothe, Ohio, facility discharges into the
Ohio River Basin.

EFFECTS OF INFLATION

Inflation remains at a low rate and is not expected to have a significant effect
in the near term.

YEAR 2000 READINESS DISCLOSURE

The Year 2000 issue concerns the inability of computerized information and
process control systems to properly recognize and process date-sensitive
information as 2000 approaches.  Mead expects that costs associated with the
Year 2000 issue will not have a material adverse impact on its results of
operations, liquidity or capital resources.

Mead is engaged in a five-step process in dealing with the Year 2000 issue:
inventory; assessment; corrective action; testing; and implementation.  With
regard to Information Technology (IT) systems, Mead has completed the inventory
and assessment phases, and, for most of its IT systems, has completed the
corrective action phase.  This effort includes all its major information
systems: financial; administrative; manufacturing; and business systems such as
order entry and billing.  IT systems are comprised of packaged software and some
proprietary systems developed by Mead.  In early 1997, the company began a
specific work plan to modify, upgrade or replace affected systems.  Most of this
corrective action was completed in 1998, and the remainder will be substantially

                                       20
<PAGE>
 
completed in the first half of 1999.  Systems testing began in 1998 and will be
conducted throughout 1999.

The company's manufacturing and converting facilities also rely on non-IT
systems such as process control systems for monitoring and regulating power,
production, emissions and safety equipment.  Some of these systems include date-
sensitive information.  Mead has process control systems at its five major paper
mills, three smaller paper mills; more than 30 converting plants in its
packaging, containerboard and school and office products businesses, and
packaging equipment at some customer facilities.  In 1998, Mead, with the
assistance of a third-party consultant, substantially completed the inventory
and assessment phases of process control equipment at its operating facilities,
coordinating this effort with vendors to identify at-risk devices.  Corrective
action and testing of critical non-IT systems began in 1998 and will be
conducted throughout 1999.  In some cases, corrective action and testing will be
conducted during periods of maintenance downtime.

In 1998, Mead also initiated efforts to evaluate the Year 2000 issue as it
relates to principal third parties, primarily customers and suppliers.  These
efforts include communicating Mead's assurance to major customers that it will
meet sales commitments before and after year-end 1999.  Mead has contacted major
suppliers to seek their assurance that contracts with Mead will not be breached
due to Year 2000 issues.  Mead has also contacted its major vendors of hardware,
software and process control systems to assist in identifying and resolving Year
2000 issues.

In 1998, Mead announced its intention to implement an enterprise resource
planning system across the company over the next three to four years.  Mead is
not relying on the implementation of that system to address Year 2000 issues.

The costs associated with Mead's remediation of the Year 2000 issue include
amounts for upgrading and replacing non-compliant packaged software and hardware
for IT and non-IT systems, the costs of fixing or renovating proprietary IT and
non-IT systems and the costs related to the use of third-party Year 2000
solution providers.  These costs include incremental costs, such as hardware and
software, and non-incremental costs, such as the redeployment of company
resources to address the Year 2000 issue.  The total estimated cost Mead expects
to incur between 1997 and 2000 to complete its assessment and remediation of the
Year 2000 issue is $30-$40 million.  Through 1998, Mead incurred costs totaling
approximately $12 million, including $8 million in repair costs and $4 million
in replacement costs.  A portion of the total cost through 1998, approximately
25%, was considered non-incremental cost related to the redeployment of
resources.  The majority of the estimated remaining costs relate to replacement
or modification of affected process control systems in the corporation's
manufacturing operations.  Some of these costs will be expensed as incurred.
Other costs, such as those used for the purchase of new systems, will be
capitalized in accordance with generally accepted accounting principles.  These
capitalized costs are expected to fall within the company's current plan for
capital expenditures.

The company considers the risk to be low that its IT systems will be disrupted
by the Year 2000 issue because it relies to a great extent on packaged software
for its major business systems at the corporate and operating division levels.
Mead is less reliant on proprietary systems, which generally require greater
time to correct.  The company expects to complete the repair or replacement of
its proprietary systems by the first half of 1999.

Mead currently considers that there is a higher level of uncertainty related to
the repair and replacement of non-IT systems such as process control systems at
its manufacturing and converting facilities.  These systems are more numerous,
and the effort to identify and replace non-compliant processors and hardware,
which involves third-party vendors and consultants, is more complex.  The
company 

                                       21
<PAGE>
 
began working with vendors in 1997 as they acknowledged process control systems
issues. Efforts with vendors intensified in 1998, and an outside consultant was
retained to expedite the process. Failure to identify and correct non-IT systems
could result in interruptions in manufacturing, safety or environmental systems.
Mead fully expects to complete corrective action and testing in 1999 to mitigate
this uncertainty.

Mead relies on governmental services and third-party suppliers for raw
materials, utilities, water, transportation and other key services.  Significant
interruption caused by these parties could affect Mead operations overall and
its ability to deliver products and services to its customers.  If Mead's
customers were to experience Year 2000 interruptions in their own operations, it
could result in reduced sales for Mead.

In 1998, Mead began development of contingency plans within each business unit
to lessen the impact of possible interruptions to its manufacturing operations
or to customer service caused by delays in delivery of raw materials, utilities,
water, transportation services from suppliers and government services. Mead is
working with major customers to determine risks and alternatives to avoid any
possible disruptions.  The company expects to finalize these plans by mid-1999.

There is a risk that efforts to achieving Year 2000 compliance may not be
completed on time.  Failure to meet important milestones in the company's plans
would alert the company to take steps necessary to notify customers, suppliers,
employees and others.

Oversight of the company's Year 2000 efforts is the responsibility of the
Executive Business Council.  The Council includes the Chief Financial Officer,
Chief Information Officer (CIO), General Counsel and Chief Purchasing Officer.
The CIO reports the status of the company's readiness to the Audit Committee of
the Board of Directors.

DERIVATIVE DISCLOSURE

Mead is exposed to market risk from changes in interest rates, foreign currency
exchange rates, and commodity prices.  To manage these market risk exposures,
the company enters into various hedging transactions governed by corporate
policies and procedures that are approved and regularly reviewed by the Finance
Committee of the Board of Directors.  Mead does not use financial instruments
for trading purposes.

INTEREST RATES

Mead's objective is to reduce its interest expense through a blend of fixed and
floating interest rate instruments.  The company primarily funds itself with
long-term debt having final maturities ranging from five to 50 years, a portion
of which has variable interest rates, and variable interest rate commercial
paper.  The company uses interest rate swaps and caps in managing its mix of
fixed and floating rate debt.

Mead assesses its interest rate risk by estimating the potential increase in its
debt portfolio's fair market value resulting from a hypothetical parallel
downward shift of the yield curve.  Using the portfolio valuation models
available from Bloomberg/TM/, which use theoretical values as well as market
prices for instruments with similar characteristics, including the theoretical
value of any embedded options (e.g. puts or calls), a hypothetical 100 basis
point parallel downward shift of the yield curve would increase the fair market
value of Mead's debt portfolio by approximately $91 million and $99 million, at
December 31, 1998 and 1997, respectively.

                                       22
<PAGE>

During 1999, several financial instruments will mature and the company will
consider alternatives that are consistent with business conditions, the interest
rate environment and its interest rate exposure management policy.

FOREIGN CURRENCY

Mead has foreign-based operations, primarily in Western Europe, which accounted
for approximately 14% of its 1998 net sales, and has a 50% interest in a
Canadian-based investee.  In addition, certain of Mead's domestic operations
make sales to foreign customers.  In the conduct of its foreign operation, Mead
also makes intercompany sales, and receives royalties and dividends denominated
in many different currencies.  All of this exposes Mead to the effect of changes
in foreign currency exchange rates.  Flows of foreign currencies into and out of
Mead's domestic operations are generally stable and regularly occurring, and are
recorded at fair market value in Mead's financial statements.  Mead also issues
intercompany loans to its foreign subsidiaries in their local currencies,
exposing it to the effect of changes in spot exchange rates at loan issue and
loan repayment dates.  Generally, Mead uses forward exchange contracts with
terms of less than one year to hedge these exposures.  Based upon Mead's overall
foreign currency exchange rate exposure at December 31, 1998, including
derivative and other foreign currency sensitive instruments, a 10% adverse
change in currency rates would not materially affect Mead's financial position,
or annual results of operations or cash flows.

COMMODITIES

Mead is exposed to price changes in raw materials, components, and items
purchased for resale.  The prices of some of these items can vary significantly
over time due to changes in the national and international markets in which the
company's many suppliers operate.  Mead's selling prices often change in a
similar fashion, although often to a greater or lesser degree.  The company does
not use a significant amount of financial instruments to manage its exposure to
commodity price changes.

OUTLOOK

Selling prices for many grades of paper and paperboard are affected by changes
in supply and demand.  While growth in demand is generally gradual and tracks
the rate of domestic economic growth, new supply comes onto the market in large
increments with the start-up of new production capacity.  The result can be
temporary periods of oversupply that lead to price weakness, as in 1997 and
1998.  New capacity in the U.S. is expected to grow at a slower rate between
1999 and 2001 than in the previous two years, according to the American Forest
and Paper Association.  New global capacity, primarily in Europe and Asia, has
increasingly become a factor in recent years.  In 1998, new global capacity and
weaker markets in Asia led to an increase in imports of paper in the U.S.
market, lower selling prices and reduced mill production schedules.  The
continued weakness in Asian economies is expected to continue pressuring U.S.
prices.  In the second half of 1998, Mead took downtime in coated paper to more
closely match production and shipments.  For the first half of 1999, Mead has
cut planned production of coated paper by approximately 50,000 tons.

Mead's international sales are approximately 14% of overall sales, with most of
it in Mead's Packaging, Coated Board and School and Office Products divisions,
primarily in Europe and Canada.  Fluctuations in European and Canadian
currencies can affect operating results of these divisions.  The impact in 1998
and 1997 was not material to Mead's overall results.  The impact on Mead of the
move to a common currency in Europe (the Euro) is uncertain at this time, but is
not expected to be material.


                                      23
<PAGE>

During the year, Mead announced that it will implement enterprise resource
planning (ERP) software across the company. Over time, the company expects that
the technology will help achieve meaningful cost reductions and enhanced
operating efficiencies. As a result, Mead expects a 5% reduction in the number
of salaried employees and charges in future quarters related to the ERP
implementation. Mead previously stated that this charge could be as much as $15
million in future quarters.

FORWARD-LOOKING STATEMENTS

Forward-looking statements throughout this report are based on current
expectations and subject to numerous risks and uncertainties, which could cause
actual results to differ materially from those expressed.  These risks and
uncertainties include, but are not limited to: growth of supply in different
sectors of the paper and forest products industry, particularly in the U.S.,
Europe, and Asia; demand for pulp in world markets; demand for paper and
paperboard in U.S. and European markets; market prices for these products;
fluctuations in foreign currency, primarily in Europe; the introduction of a new
European currency (Euro); the stability of the financial markets; capacity
spending levels in the industry; general business and economic conditions in the
U.S., Europe, Asia and South America; interest rates and their volatility;
government actions; resolution of Year 2000 issues; competitive factors; and
opportunities that may be presented to and pursued by the company not known at
this time.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

See information in Item 7.

Item 8.  Financial Statements and Supplementary Data


                                 Financial Statements
<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Financial Statements:
 Independent Auditors' Report............................................     25
 Statements of earnings..................................................     26
 Balance sheets..........................................................     27
 Statements of shareowners' equity.......................................     28
 Statements of cash flows................................................     29
 Notes to financial statements...........................................  30-49

                                 Supplementary Data

Selected quarterly financial data........................................     50
</TABLE>

                                       24
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT



Board of Directors
The Mead Corporation
Dayton, Ohio


We have audited the accompanying balance sheets of The Mead Corporation and
consolidated subsidiaries as of December 31, 1998 and 1997, and the related
statements of earnings, shareowners' equity and cash flows for each of the three
years in the period ended December 31, 1998.  Our audits also included the
financial statement schedule listed in the Index at Item 14 (a)2.  These
financial statements and financial statement schedule are the responsibility of
the Company's management.  Our responsibility is to express an opinion on these
financial statements and financial statement schedule 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, such financial statements present fairly, in all material
respects, the financial position of The Mead Corporation and consolidated
subsidiaries at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles.  Also, in
our opinion, such financial statement schedule, 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/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP

Dayton, Ohio
January 28, 1999

                                       25
<PAGE>
 
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
--------------------------------------------------

STATEMENTS OF EARNINGS
----------------------

<TABLE>
<CAPTION>

Year Ended December 31                                           1998         1997          1996
(All amounts in millions, except per share amounts)
<S>                                                          <C>          <C>           <C>  
Net sales                                                    $3,772.2     $3,745.8      $3,303.9
Cost of products sold (Note J)                                3,049.5      3,008.5       2,578.2
                                                             -----------------------------------
  Gross profit                                                  722.7        737.3         725.7
Selling and administrative expenses (Note J)                    422.3        404.4         393.4
                                                             -----------------------------------
  Earnings from operations                                      300.4        332.9         332.3
Other revenues - net (Note K)                                    34.2          7.3           9.4
Interest and debt expense                                      (109.0)       (98.2)        (57.7)
                                                             -----------------------------------
  Earnings from continuing operations
    before income taxes                                         225.6        242.0         284.0
Income taxes (Note L)                                            83.7         87.9         104.5
                                                             -----------------------------------
  Earnings from continuing operations before
    equity in net earnings (loss) of investees                  141.9        154.1         179.5
Equity in net earnings (loss) of investees (Note C)              (1.8)         8.9           4.3
                                                             -----------------------------------
  Earnings from continuing operations                           140.1        163.0         183.8
Discontinued operations (Note M)                                (20.4)       (12.9)         11.5
                                                             -----------------------------------
  Net earnings                                               $  119.7     $  150.1      $  195.3
                                                             ===================================
Earnings per common share - basic (Note A):
  Earnings from continuing operations                        $   1.36     $   1.56      $   1.75
  Discontinued operations                                        (.20)        (.12)          .11
                                                             -----------------------------------
  Net earnings                                               $   1.16     $   1.44      $   1.86
                                                             ===================================
  Weighted-average number of common shares
    outstanding                                                 103.3        104.5         104.8
                                                             ===================================
Earnings per common share - assuming dilution (Note A):
  Earnings from continuing operations                        $   1.34     $   1.53      $   1.73
  Discontinued operations                                        (.20)        (.12)          .11
                                                             -----------------------------------
  Net earnings                                               $   1.14     $   1.41      $   1.84
                                                             ===================================
  Weighted-average number of common shares
    outstanding - assuming dilution                             104.9        106.4         106.3
                                                             ===================================
</TABLE> 
 
See notes to financial statements.

                                       26
<PAGE>
 
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
--------------------------------------------------
 
BALANCE SHEETS
--------------
<TABLE> 
<CAPTION> 
December 31                                                    1998       1997
(All amounts in millions)
<S>                                                        <C>        <C>  
ASSETS
------
 
Current assets:
  Cash and cash equivalents                                $  102.0   $   29.5
  Accounts receivable, less allowance for
    doubtful accounts of $17.3 in 1998 and
    $15.0 in 1997                                             414.7      421.4
  Inventories (Note B)                                        479.5      424.4
  Deferred tax asset (Note L)                                  42.6       34.2
  Other current assets                                         47.6       41.7
                                                           -------------------
     Total current assets                                   1,086.4      951.2
 
Investments and other assets (Notes C and N)                  683.1      644.6
 
Property, plant and equipment, net
  (Notes D and P)                                           3,372.7    3,273.8
 
Net assets of distribution segment (Note M)                              282.8
                                                           -------------------
     Total assets                                          $5,142.2   $5,152.4
                                                           ===================
LIABILITIES AND SHAREOWNERS' EQUITY
-----------------------------------
 
Current liabilities:
  Accounts payable (Note E)                                $  275.9   $  279.2
  Accrued expenses and other current
    liabilities (Notes E and Q)                               395.7      357.5
  Current maturities of long-term debt                          7.9        1.8
                                                           -------------------
     Total current liabilities                                679.5      638.5
 
Long-term debt (Notes F and P)                              1,367.4    1,428.0
 
Commitments and contingent liabilities (Notes P and Q)
 
Deferred items (Notes L and O)                                843.3      797.4
 
Shareowners' equity (Notes H and I):
  Common shares                                               151.9      154.9
  Additional paid-in capital                                   66.3       53.5
  Retained earnings                                         2,076.9    2,100.6
 
  Other comprehensive loss                                    (43.1)     (20.5)
                                                           ------------------- 
                                                            2,252.0    2,288.5
                                                           -------------------
     Total liabilities and shareowners' equity             $5,142.2   $5,152.4
                                                           ===================
</TABLE>
See notes to financial statements.

                                       27
<PAGE>
 
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
--------------------------------------------------

STATEMENTS OF SHAREOWNERS' EQUITY
---------------------------------
<TABLE>
<CAPTION>
(All dollar amounts in
millions, except per share                                                                                  
amounts in thousands )                    Common Shares                                            Other    Comprehensive  
                                       -------------------       Additional        Retained    Comprehensive   Earnings
                                       Shares       Amount     Paid-In Capital     Earnings         Loss        (Loss)
                                       ----------------------------------------------------------------------------------
<S>                                    <C>          <C>        <C>                 <C>         <C>          <C>
December 31, 1995                      105,794      $157.8         $               $2,003.2       $  (.8)       $
 
     Net earnings                                                                     195.3                      195.3
     Shares issued                         672          .9          13.4
     Shares purchased                   (2,194)       (3.2)          (.2)             (56.5)
     Cash dividends -
       $.59 a common
       share                                                                          (61.9)
     Foreign currency
       translation
       adjustment                                                                                   (1.6)         (1.6)
                                       ---------------------------------------------------------------------------------- 
December 31, 1996                      104,272       155.5          13.2            2,080.1         (2.4)       $193.7
                                                                                                                ------
     Net earnings                                                                     150.1                     $150.1
     Shares issued                       1,743         2.6          41.2
     Shares purchased                   (2,130)       (3.2)          (.9)             (65.8)
     Cash dividends -
       $.61 a common
       share                                                                          (63.8)
     Foreign currency
       translation
       adjustment                                                                                  (18.1)        (18.1)
                                       ----------------------------------------------------------------------------------
December 31, 1997                      103,885       154.9          53.5            2,100.6        (20.5)       $132.0
                                                                                                                ------
     Net earnings                                                                     119.7                     $119.7
     Shares issued                         587          .9          14.5
     Shares purchased                   (2,642)       (3.9)         (1.7)             (77.2)
     Cash dividends -
       $.64 a common
       share                                                                          (66.2)
     Foreign currency
       translation
       adjustment                                                                                  (15.0)        (15.0)
     Change in minimum
       pension liability (net
       of income tax benefit
       of $4.5)                                                                                     (7.6)         (7.6)
                                       ---------------------------------------------------------------------------------- 
December 31, 1998                      101,830      $151.9         $66.3           $2,076.9       $(43.1)       $ 97.1
                                       ==================================================================================
</TABLE>

See notes to financial statements.

                                       28
<PAGE>
 
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
--------------------------------------------------

STATEMENTS OF CASH FLOWS
------------------------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
------------------------------------------------
<TABLE>
<CAPTION>
 
Year Ended December 31                                    1998      1997       1996
(All dollar amounts in millions)
<S>                                                    <C>       <C>       <C>
Cash flows from operating activities:
  Net earnings                                         $ 119.7   $ 150.1   $   195.3
  Adjustments to reconcile net earnings to net
    cash provided by operating activities:
      Depreciation, amortization and depletion of
        property, plant and equipment                    260.3     238.4       199.2
      Depreciation and amortization of other assets       41.5      44.1        45.2
      Deferred income taxes                               30.5      37.2        54.2
      Investees - earnings and dividends                  16.3       1.3         7.1
          Gain on sale of assets                         (28.3)
      Discontinued operations                             20.4      12.9       (11.5)
      Other                                                8.9     (20.8)      (16.2)
      Change in assets and liabilities, excluding
        effects of acquisitions and dispositions:
         Accounts receivable                              17.1        .3        35.6
         Inventories                                     (46.0)     11.5       (13.8)
         Other current assets                             (5.6)      2.1         6.8
         Accounts payable and accrued liabilities         (6.1)    (26.7)      (40.7)
  Cash (used in) discontinued operations                  (8.5)    (50.2)      (39.8)
                                                       -----------------------------
      Net cash provided by operating activities          420.2     400.2       421.4
                                                       -----------------------------
Cash flows from investing activities:
  Capital expenditures                                  (384.0)   (437.3)     (428.7)
     Additions to equipment rented to others             (31.1)    (33.0)      (40.6)
  Payments for acquired businesses                       (50.9)   (640.4)
  Proceeds from sale of assets                           342.2      19.6
  Other                                                  (33.6)     (3.4)       18.6
                                                       -----------------------------
      Net cash (used in) investing activities           (157.4)   (473.7)   (1,071.5)
                                                       -----------------------------
Cash flows from financing activities:
  Additional borrowings                                  160.5     719.5       561.1
  Payments on borrowings                                (217.2)   (547.2)      (75.5)
  Cash dividends paid                                    (66.2)    (63.8)      (61.9)
  Common shares issued                                    15.4      43.8        14.3
  Common shares purchased                                (82.8)    (69.9)      (59.9)
                                                       -----------------------------
      Net cash provided by (used in) financing
       activities                                       (190.3)     82.4       378.1
                                                       -----------------------------
Increase (decrease) in cash and cash equivalents          72.5       8.9      (272.0)
Cash and cash equivalents at beginning of year            29.5      20.6       292.6
                                                       -----------------------------
Cash and cash equivalents at end of year               $ 102.0   $  29.5   $    20.6
                                                       =============================
</TABLE>

See notes to financial statements.

                                       29
<PAGE>
 
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
--------------------------------------------------

NOTES TO FINANCIAL STATEMENTS
-----------------------------

YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
--------------------------------------------

A - Significant Accounting Policies

CONSOLIDATION.  The accompanying financial statements include the accounts of
the Company and its wholly-owned subsidiaries.  All intercompany transactions
are eliminated.  Investments in investees are stated at cost plus the Company's
equity in their undistributed net earnings since acquisition.

CASH AND CASH EQUIVALENTS.  The Company considers all highly liquid investments
with an original maturity of three months or less when purchased to be cash
equivalents.

INVENTORIES.  The inventories of finished and semi-finished products and raw
materials are stated primarily at the lower of cost or market determined on the
last-in, first-out (LIFO) basis.  Stores and supplies are stated at cost
determined on the first-in, first-out (FIFO) basis.

OTHER ASSETS.  Included in other assets are goodwill and other intangibles,
which are being amortized using the straight-line method over their estimated
useful lives of 10 to 15 years.  The Company periodically reviews goodwill
balances for impairment based on the expected future cash flows of the related
businesses acquired.

COMPUTER SOFTWARE COSTS.  The Company capitalizes costs of computer software
purchased from third parties and used for internal purposes.  These costs are
amortized using the straight-line method over their estimated useful lives of
three years.

DEPRECIATION AND DEPLETION.  Depreciation of property, plant and equipment and
amortization of capital leases and land improvements are calculated using the
straight-line method over the estimated useful lives of the properties.  The
rates used to determine timber depletion are based on projected quantities of
timber available for cutting and are calculated annually.

INTEREST RATE AND FOREIGN EXCHANGE FINANCIAL INSTRUMENTS.  Amounts currently due
to or from interest rate swap counterparties are recorded in interest expense in
the period in which they accrue.  The premiums paid to purchase interest rate
caps, as well as gains or losses on terminated interest rate swap and cap
agreements, are included in long-term liabilities or assets and amortized to
interest expense over the shorter of the original term of the agreements or the
life of the financial instruments to which they are matched.  Gains or losses on
foreign currency forward contracts are recognized currently through income and
generally offset the transaction losses or gains on the foreign currency cash
flows which they are intended to hedge.

ENVIRONMENTAL LIABILITIES.  The Company records accruals for environmental costs
based on estimates developed in consultation with environmental consultants and
legal counsel in accordance with the requirements of Statement of Financial
Accounting Standards (SFAS) No. 5.  The estimated costs to be incurred in
closing existing landfills, based on current environmental requirements and
technologies, are accrued over the expected useful lives of the landfills.

ESTIMATES AND ASSUMPTIONS.  The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the reported revenues and expenses during a period.  Estimates
and assumptions are also used in the disclosures of contingent assets and
liabilities at the date of the financial statements.  Actual results could
differ from those estimates.

NET EARNINGS PER COMMON SHARE.  Net earnings per common share are computed by
dividing net earnings by the weighted average number of common shares
outstanding during each year.  The 

                                       30
<PAGE>
 
difference between earnings per common share and earnings per common share-
assuming dilution is the result of outstanding stock options.

STOCK OPTIONS.  The Company measures compensation cost for stock options issued
to employees using the intrinsic value based method of accounting in accordance
with Accounting Principles Board Opinion No. 25.

COMPREHENSIVE EARNINGS.  Effective January 1, 1998, the Company adopted SFAS No.
130, Reporting Comprehensive Income.  The Company's difference between net
earnings and comprehensive earnings relates to the changes in foreign currency
translation adjustment and changes in additional minimum pension liability.

ACCOUNTING PRONOUNCEMENT.  In June 1998, SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, was issued.  The statement requires
derivatives to be recorded on the balance sheet as assets or liabilities,
measured at fair value.  Gains or losses resulting from changes in fair value of
the derivatives are recorded depending upon whether the instruments meet the
criteria for hedge accounting.  The impact of adopting this statement is not
anticipated to be material to the financial statements.  This statement is
effective for fiscal years beginning after June 15, 1999.

B - Inventories

<TABLE>
<CAPTION>
December 31                             1998    1997
(All dollar amounts in millions)
<S>                                    <C>     <C>

Finished and semi-finished products    $295.0  $242.4
Raw materials                           109.2    99.3
Stores and supplies                      75.3    82.7
                                       --------------
                                       $479.5  $424.4
                                       ==============
</TABLE> 

For purposes of comparison to non-LIFO companies, inventories valued at current
replacement cost would have been $175.6 million and $179.0 million higher than
reported at December 31, 1998 and 1997, respectively.

C - Investments and Other Assets

<TABLE>
<CAPTION>
December 31                                 1998    1997
(All dollar amounts in millions)
<S>                                        <C>     <C>
 
Investment in investees                    $127.5  $151.1
Pension asset                               264.3   237.2
Equipment rented to others, at cost
 (net of accumulated depreciation of
 $290.7 in 1998 and $257.0 in 1997)          83.3    90.1
Cash surrender value of life insurance,
 less policy loans of $45.4 in 1998 and
 $40.1 in 1997                              118.8    94.3
Other                                        89.2    71.9
                                           --------------
                                           $683.1  $644.6
                                           ==============
</TABLE> 

The Company's principal investees are the 50%-owned Northwood Forest Industries
Ltd., which manufactures bleached softwood kraft pulp, lumber and plywood and
the 30% ownership interest in a limited partnership which operates the
cogeneration facility located at the Rumford, Maine, paper mill.  Under an
agreement with Northwood, Mead is entitled to purchase the pulp it requires.

                                       31
<PAGE>
 
Total investments in investees are as follows:
<TABLE>
<CAPTION>
December 31                                                  1998     1997
<S>                                                          <C>      <C>      
(All dollar amounts in millions)
 
Investments, at cost                                         $ 50.1   $ 48.9
Foreign currency translation adjustment                       (23.8)   (15.3)
Equity in undistributed net earnings                          101.2    117.5
Total investments in investees (equal to                     ---------------
  Mead's share of investees' equity)                         $127.5   $151.1
                                                             ===============

Summarized operating data for all investees is presented in the following table:

Year Ended December 31                                       1998     1997     1996
(All dollar amounts in millions)

Revenues:
  Sales to Mead                                              $ 67.9   $ 66.4   $ 30.4
  Sales to other customers                                    623.7    658.1    638.4
                                                             ------------------------
                                                             $691.6   $724.5   $668.8
                                                             ========================
Purchases from Mead                                          $ 49.2   $ 43.5   $  8.5
                                                             ========================
Gross profit                                                 $ 42.9   $ 77.0   $ 49.5
                                                             ========================
Net earnings                                                 $ 18.3   $ 28.2   $ 14.0
                                                             ========================
Mead's share of net earnings
  (loss), after reduction for
  Mead's income taxes on
  partnership earnings                                       $ (1.8)  $  8.9   $  4.3
                                                             ========================
Dividends and partnership
  distributions received                                     $  20.3  $  11.9  $ 13.4
                                                             ========================

Summarized balance sheet data for all investees is as follows:

December 31                                                  1998     1997
(All dollar amounts in millions)
Current assets                                               $212.9   $271.1
Noncurrent assets                                             739.5    767.5
Current liabilities                                          (132.1)  (148.6)
Long-term debt and deferred items                            (534.4)  (562.0)
                                                             ---------------
Equity                                                       $285.9   $328.0
                                                             ===============
</TABLE>

                                       32
<PAGE>
 
D - Property, Plant and Equipment
<TABLE>
<CAPTION>


December 31                                   1998      1997
<S>                                       <C>       <C>
(All dollar amounts in millions)

Property, plant and equipment, at cost
  Land and land improvements              $  165.4  $  162.1
  Buildings                                  615.3     580.2
  Machinery and equipment                  4,492.2   4,123.3
  Construction in progress                    87.9     237.0
                                          ------------------
                                           5,360.8   5,102.6
Less accumulated amortization and
  depreciation                            (2,369.1) (2,191.3)
                                          ------------------ 
                                           2,991.7   2,911.3
Timber and timberlands, net of timber
  depletion                                  381.0     362.5
                                          ------------------
    Property, plant and equipment, net    $3,372.7  $3,273.8
                                          ==================

E - Current Liabilities

December 31                                   1998      1997
(All dollar amounts in millions)

Accounts payable:
  Trade                                   $  199.2  $  175.8
  Affiliated companies                        32.5      37.1
  Outstanding checks                          44.2      66.3
                                          --------  --------
                                          $  275.9  $  279.2
                                          ========  ========
Accrued expenses and other
current liabilities:
  Accrued wages                           $   88.7  $   89.4
  Taxes, other than income                    40.1      36.0
  Accrued interest                            37.2      36.3
  Other current liabilities                  229.7     195.8
                                          ------------------
                                          $  395.7  $  357.5
                                          ==================
</TABLE>

                                       33
<PAGE>
 
<TABLE>
<CAPTION>
F - Long-Term Debt

December 31                                             1998     1997
(All dollar amounts in millions)
<S>                                                  <C>       <C>
Capital lease obligations                           $  287.3   $  187.2
Variable-rate Industrial
  Development Revenue Bonds, due from 2001
    through 2023, average effective rate 3.4%          165.4      163.4
8-1/8% debentures, face amount of $150.0,
  due 2023 (effective rate 8.4%)                       147.9      147.8
7-1/8% debentures, face amount of $150.0,
  due 2025 (effective rate 7.4%)                       147.2      147.0
7.35% debentures, face amount of $150.0, due
  2017 (effective rate 7.4%)                           148.5      148.4
6.84% debentures, face amount of $150.0, due
  2037 (effective rate 7.0%)                           148.2      148.0
7.55% debentures, face amount of $150.0, due
  2047 (effective rate 7.7%)                           143.6      143.5
6.60% notes, face amount of $100.0, due 2002
  (effective rate 6.9%)                                 99.0       98.7
Medium-term notes, 7.3% to 9.8%, face amount
  of $78.5, due from 2000 through 2020 (effective
  rate 10.0%)                                           75.9       75.0
Short-term borrowings refinanced on a long-term
  basis                                                           155.3
Other                                                    4.4       13.7
                                                    --------   --------
</TABLE>
                                                    $1,367.4   $1,428.0
                                                    ========   ========

Capital lease obligations consist primarily of Industrial Development Revenue
Bonds and Notes with an average effective rate of 4.3%.  The variable-rate
Industrial Development Revenue Bonds are supported by letters of credit.  The
interest rates on the variable-rate tax-exempt bonds closely follow the tax-
exempt commercial paper rates.

The 8-1/8% and 7-1/8% debentures are callable by the Company at approximately
103% beginning in 2003.  The 6.84% debentures can be put to the Company at par
value in 2007.

The Company has a $500 million bank credit agreement that extends until October
2002.  The agreement supports $74.5 million of the Company's capital lease
obligations and contains restrictive covenants and requires commitment fees in
accordance with standard banking practices.  The Company has the ability to
borrow up to $425.5 million at December 31, 1998.

Maturities of long-term debt for the next five years are $7.9 million in 1999,
$35.5 million in 2000, $12.6 million in 2001, $135.3 million in 2002 and $1.0
million in 2003.

The Company has guaranteed obligations of certain affiliated operations and
others totaling $39.9 million at December 31, 1998.  In addition, the Company
has a 50% interest in a partnership with Kimberly-Clark Corporation, which has
borrowed $300 million under a loan agreement with a syndicate of banks, which
matures in 2003.  The loan, one-half of which has been guaranteed by the
Company, may be prepaid at any time either in cash or by delivery of notes
receivable from Georgia-Pacific Corporation held by the partnership as part of
the consideration from the 1988 sale of Brunswick Pulp and Paper Company, a
former affiliate.  It is not practicable to estimate the fair value of the above
guarantees, however, the Company does not expect to incur losses as a result of
these guarantees.

G - Financial Instruments

The Company uses various derivative financial instruments as part of an overall
strategy to manage the Company's exposure to market risks associated with
interest rate and foreign currency exchange rate fluctuations.  The Company uses
foreign currency forward contracts to

                                       34
<PAGE>
 
manage the foreign currency exchange rate risks associated with its
international operations. The Company utilizes interest rate swap and cap
agreements to manage its interest rate risks on its debt instruments, including
the reset of interest rates on variable rate debt. The Company does not hold or
issue derivative financial instruments for trading purposes.

The risk of loss to the Company in the event of nonperformance by any
counterparty under derivative financial instrument agreements is not considered
significant by management. All counterparties are rated A or higher by Moody's
and Standard and Poor's. Although the derivative financial instruments expose
the Company to market risk, fluctuations in the value of the derivatives are
mitigated by expected offsetting fluctuations in the matched instruments.

As part of an overall strategy to maintain an acceptable level of exposure to
the risk of interest rate fluctuation, the Company has developed a targeted mix
of fixed-rate and cap-protected debt versus variable-rate debt.  To efficiently
manage this mix, the Company may utilize interest rate swap, cap and option
agreements to effectively convert the debt portfolio into an acceptable fixed-
rate, capped rate and variable-rate mix.

Under interest rate swap agreements, the Company agrees with other parties to
exchange, at specified intervals, the difference between fixed-rate and
variable-rate interest amounts calculated by reference to an agreed-upon
notional principal amount. The Company utilizes interest rate cap agreements to
limit the impact of increases in interest rates on its floating rate debt.  The
interest rate cap agreements require premium payments to counterparties based
upon a notional principal amount.  Interest rate cap agreements entitle the
Company to receive from the counterparties the amounts, if any, by which the
selected market interest rates exceed the strike rates stated in the agreements.

The fair values of the interest rate swap and cap agreements are estimated using
quotes from brokers and represent the cash requirement if the existing
agreements had been settled at year end.  Selected information related to the
Company's interest rate swap and cap agreements is as follows:

<TABLE> 
<CAPTION> 

                           Swap agreements        Cap agreements
December 31                1998        1997      1998        1997
(All dollar amounts
in millions)
<S>                    <C>         <C>        <C>        <C>   

Notional amount        $  114.2    $  180.0   $  50.0    $  150.0
                       ==========================================
Fair value             $   (4.6)   $   (5.6)  $          $
Carrying amount            (3.2)       (4.9)       .2          .3
                       ------------------------------------------
Net unrecognized (loss)$   (1.4)   $    (.7)  $   (.2)   $    (.3)
                       ==========================================
</TABLE> 

The Company utilizes foreign currency forward contracts to reduce exposure to
exchange rate risks primarily associated with transactions in the regular course
of the Company's international operations.  The forward contracts establish the
exchange rates at which the Company will purchase or sell the contracted amount
of specified foreign currencies at a future date.  The Company utilizes forward
contracts which are short-term in duration (generally one month) and receives or
pays the difference between the contracted forward rate and the exchange rate at
the settlement date.  The major currency exposures hedged by the Company are the
Dutch guilder, British pound, Japanese yen and German mark.  The contract amount
of foreign currency forwards at December 31, 1998 and 1997, is $127.2 million
and $129.0 million, respectively.  The carrying amount and fair value of these
contracts are not significant.

The fair value of the Company's long-term debt is estimated based on quoted
market prices for the same or similar issues or on current rates offered to the
Company for debt of the same remaining maturities.  The fair value of long-term
debt, excluding capital leases, was $1,152.2 million and $1,310.1 million at
December 31, 1998 and 1997, respectively, and the related carrying amounts were
$1,080.1 million and $1,240.8 million, respectively.

                                       35
<PAGE>
 
At December 31, 1998 and 1997, the Company held short-term investments which are
included in cash and cash equivalents.  The carrying amount of these short-term
investments is a reasonable estimate of fair value.

H - Shareowners' Equity

The Company has authorized 300 million no par common shares.  The Company has
outstanding authorization from the Board of Directors to repurchase up to 10
million common shares of which 8.8 million have been repurchased as of December
31, 1998.  A total of 33.0 million and 30.4 million common shares were held in
treasury at December 31, 1998 and 1997, respectively.

Under a Rights Agreement, each outstanding common share presently has one right
attached which trades with the common share.  Generally, the rights become
exercisable and trade separately 10 days after a third party acquires 20% or
more of the common shares or commences a tender offer for a specified percentage
of the common shares.  In addition, the rights become exercisable if any party
becomes the beneficial owner of 10% or more of the outstanding common shares and
is determined by the Board of Directors to be an adverse party. Upon the
occurrence of certain additional triggering events specified in the Rights
Agreement, each right would entitle its holder (other than, in certain
instances, the holder of 20% or more of the common shares) to purchase common
shares of the Company (or, in certain circumstances, cash, property or other
securities of the Company) having a value of $200 for $100, the initial exercise
price.  The rights expire in 2006 and are presently redeemable at $.005 per
right.  At December 31, 1998, there were 149.2 million common shares reserved
for issuance under this plan.

The Board of Directors has approved termination benefits for certain key
executives and a severance plan for all other salaried employees and established
a Benefit Trust in connection with the Company's unfunded supplemental
retirement plan, deferred compensation plan, directors retirement plan and
excess benefits plan to preserve the benefits earned thereunder in the event of
a change in control of the Company.  These plans would be required to be
immediately funded upon such an event.

The Company has preferred shares authorized but unissued as follows:  61,500
undesignated cumulative preferred, par value $100; 20 million undesignated
voting cumulative preferred, without par value; 20 million cumulative preferred,
without par value; and 295,540 cumulative second preferred, par value $50.

At December 31, 1998, there is $1.3 billion available for common dividends which
represents the maximum amount of additional indebtedness that can be incurred
solely to pay common dividends while remaining in compliance with certain debt
covenants.

I - Stock-Based Compensation Plans

Officers and key employees have been granted stock options under various stock-
based compensation plans.  Options to purchase 3.3 million shares are
accompanied by limited rights which may be exercised in lieu of the option under
certain circumstances.  The exercise price of all options equals the market
price of the Company's stock on the date of the grant.  The options and rights
have a maximum term of 10 years and vest after one year or three years.  Under
the 1996 Stock Option Plan, additional options (reload options) can be granted
at the current market price upon the exercise of the original incentive stock
option.  The option holder must hold the shares acquired for three years in
order to vest in the reload options.  There are 13.0 million shares reserved for
issuance under these plans.

A Restricted Stock Plan provides for the issuance of restricted common shares to
certain employees and to directors who are not officers or employees of the
Company.  These shares are restricted for periods of six months to five years.
As of December 31, 1998, 9,000 common shares are issued and outstanding under
the plan.  There are 770,000 shares reserved for issuance under this plan.
There were 7,000, 27,000 and 4,000 shares granted in 1998, 1997 and 1996,
respectively, at a weighted-average price of $29.24, $29.58 and $27.23,
respectively.

                                       36
<PAGE>

The following table summarizes activity in the Company's stock-based
compensation plans:

<TABLE>
<CAPTION>
(All share amounts in thousands)                          1998                       1997                     1996
                                                     Weighted-                  Weighted-                Weighted-
                                                       Average                    Average                  Average
                                                      Exercise                   Exercise                 Exercise
                                         Shares          Price      Shares          Price     Shares         Price
<S>                                      <C>         <C>            <C>         <C>           <C>        <C>
Outstanding at beginning of year          7,480         $24.62       7,470         $22.44      6,528        $20.97
Granted                                   1,734          34.11       1,902          29.73      1,744         26.61
Exercised                                  (604)         22.12      (1,825)         21.02       (722)        18.85
Canceled                                    (36)         32.97         (67)         25.52        (80)        25.87
                                         ------                     ------                     -----

Outstanding at end of year                8,574         $26.68       7,480         $24.62      7,470        $22.44
                                         ======                     ======                     =====

Exercisable at year end                   6,739         $24.77       5,445         $22.80      5,778        $21.22
                                         ======                     ======                     =====
Weighted-average fair value of
options granted during the year
using the extended binomial option-
pricing model                            $10.56                      $8.30                     $6.71
Weighted-average assumptions
used for grants:
  Expected dividend yield                     2%                         2%                        2%
  Expected volatility                        29%                        21%                       22%
  Risk-free interest rate                   5.6%                       6.3%                      5.6%
  Expected life of option (in years)        6.0                        5.8                       5.5
</TABLE>

The following table shows various information about stock options outstanding at
December 31, 1998:

<TABLE>
<CAPTION>
(All share amounts in thousands)
                          Options Outstanding                 Options Exercisable
                 --------------------------------------   --------------------------
                                   Weighted-
                                     Average
                         Number    Remaining  Weighted-          Number    Weighted-
                 Outstanding at  Contractual    Average   Exercisable at     Average
   Range of        December 31,     Life (in   Exercise     December 31,    Exercise
Exercise Prices            1998       years)      Price             1998       Price
<S>              <C>             <C>          <C>         <C>              <C>

$13.31 - $18.32           1,054          2.5     $16.51            1,054      $16.51
 20.75 -  27.32           3,873          5.8      24.69            3,822       24.68
 28.15 -  34.22           3,647          8.7      31.73            1,863       29.62
                          -----                                    -----
$13.31 - $34.22           8,574          6.6    $ 26.68            6,739      $24.77
                          =====                                    =====
</TABLE>

Total compensation costs charged to earnings from continuing operations before
income taxes for all stock-based compensation awards were less than $1 million
in each of 1998, 1997 and 1996.  Had compensation costs been determined based on
the fair value method of SFAS No. 123 for all plans, the Company's net earnings
and earnings per common share would have been reduced to the following pro forma
amounts:

                                       37
<PAGE>
 
<TABLE>
<CAPTION>
Year Ended December 31                 1998    1997    1996
<S>                                  <C>     <C>     <C>
 
Net earnings (in millions):
  As reported                        $119.7  $150.1  $195.3
                                     ======================
  Pro forma                          $108.7  $141.4  $188.8
                                     ======================
Earnings per common share-
  (assuming dilution)
  As reported                        $ 1.14  $ 1.41  $ 1.84
                                     ======================
  Pro forma                          $ 1.04  $ 1.33  $ 1.78
                                     ======================
</TABLE>

J - Asset Write-downs and Employee Termination Costs

During 1998, the Company recorded a pretax charge of $37.7 million write-downs
primarily in cost of sales for asset write-downs and other charges.  The charges
were principally comprised of a $10.4 million reserve for stores and supplies
inventory, $10.4 million for the write-off of capitalized software costs as a
result of the decision to implement an enterprise resource planning computer
system, an $8.2 million charge related to the Japanese packaging operation, and
$4.6 million for the write-off and disposal of certain plant equipment that was
replaced by new equipment at the Containerboard division's mill in Stevenson,
Alabama.

The reserve for stores and supplies was recorded upon the completion of a study
in the second quarter to determine the future utility of obsolete and excess
replacement parts that are used to support the maintenance of plant machinery
and equipment in the paper and packaging and paperboard segments.  The reserve
adjusted those items identified as having diminished utility to their net
realizable value and is expected to be fully utilized in the near term as items
are disposed.

As a result of the deteriorating economic environment in Japan and poor
operating performance by the Japanese packaging operation, a charge was recorded
to write-down certain inventory and to reflect the impairment of property, plant
and equipment and goodwill. The fair value of the fixed assets and goodwill and
the related write-down in value was determined based on management's assessment
of the future cash flows of the operations.

In the third quarter of 1998, the Company adopted a plan to make organizational
changes and reduce its workforce, and recorded a charge of approximately $22.0
million for employee severance and related costs in selling and administrative
expenses.  This plan involves terminating 318 domestic employees, primarily
salaried, and was communicated to employees in the third quarter.  The charge
covered severance payments and medical, dental and other benefits.  Through
December 31, 1998, 202 people have left the Company, and the remainder are
expected to leave before the end of the third quarter of 1999.

The following is a summary related to the charge for severance and other benefit
costs recorded in the year ended December 31, 1998 (in millions):

<TABLE> 
<S>                                  <C> 
Charge recorded                      $  22.0
Used for intended purpose              (12.1)
                                     -------
Balance at December 31, 1998         $   9.9
                                     =======
</TABLE> 

                                       38
<PAGE>
 
The total charges by segment for asset write-downs and employee termination
costs for the year ended December 31, 1998, are as follows (in millions):

<TABLE> 
<S>                                <C> 
Paper                              $    28.2
Packaging and Paperboard                25.2
School and Office Products               4.6
Corporate and other                      1.7
                                   ---------
                                   $    59.7
                                   =========
</TABLE> 

K - Other Revenues - Net

<TABLE> 
<CAPTION> 
Year Ended December 31                  1998     1997     1996
(All dollar amounts in millions)
<S>                                  <C>      <C>      <C> 

Investment income                    $   6.4  $   3.0  $   6.4
Gain on sale of assets                  28.3
Other                                    (.5)     4.3      3.0
                                     -------------------------
                                     $  34.2  $   7.3  $   9.4
                                     =========================
</TABLE> 

In the fourth quarter of 1998, the Company recorded a gain on sale of assets.
This gain is comprised of  $11.8 million on the sale of timberland, $13.9
million related to the sale of non-strategic packaging businesses and $2.6
million on the sale of an undeveloped mill site in Tennessee.  The effect of the
sale of the distribution segment's remaining real estate assets sold in the
fourth quarter is recorded in discontinued operations.

L - Income Taxes

The principal current and non-current deferred tax assets and (liabilities) are
as follows:

<TABLE>
<CAPTION>
December 31                                  1998        1997
(All dollar amounts in millions)         
<S>                                       <C>         <C> 
                                         
Deferred tax liabilities:                
  Accelerated depreciation               
    for tax purposes                      $(540.3)    $(493.0)
  Nontaxable pension asset                 (100.4)      (90.1)
  Deferred installment gain                 (47.5)      (47.5)
  Other                                     (63.5)      (55.0)
                                          -------------------
                                           (751.7)     (685.6)
Deferred tax assets:                     
  Alternative minimum tax carryforward       27.1        16.0
  Compensation and fringe benefits       
    accruals                                 61.2        55.8
  Postretirement benefit accrual             46.9        48.3
  Loss provisions and other expenses     
    not currently deductible                 50.7        29.3
  Other                                      25.0        21.4
                                          -------------------
                                            210.9       170.8
                                          -------------------
    Net deferred liability                $(540.8)    $(514.8)
                                          ===================
Included in the balance sheets:          
  Current assets - deferred tax asset     $  42.6     $  34.2
  Deferred items                           (583.4)     (549.0)
                                          -------------------
    Net deferred liability                $(540.8)    $(514.8)
                                          ===================
</TABLE> 

                                       39
<PAGE>
 
The significant components of income tax expense are as follows:
 
<TABLE> 
<CAPTION>  
Year Ended December 31                      1998      1997     1996
(All dollar amounts in millions)        
<S>                                      <C>       <C>       <C>  
Currently payable:                      
  Federal                                $   9.8   $  15.5   $ 36.9
  Federal alternative minimum tax           11.1      16.0
  State and local                            3.3        .2      6.8
  Foreign                                   13.4      14.3     13.1   
                                         --------------------------
                                            37.6      46.0     56.8
Change in deferred income taxes             26.0      37.2     57.4
                                         --------------------------
                                            63.6      83.2    114.2
Allocation to partnership earnings           (5.7)     (1.9)   (2.0)
Allocation to discontinued operations        21.3       6.6    (7.7)
Allocation to other comprehensive       
  loss                                       4.5
                                         --------------------------
                                         $  83.7   $  87.9   $104.5
                                         ==========================
</TABLE>

The following table summarizes the major differences between the actual income
tax provision attributable to continuing operations and taxes computed at the
federal statutory rates:

<TABLE>
<CAPTION>
Year Ended December 31                        1998    1997     1996
(All dollar amounts in millions)
<S>                                          <C>     <C>     <C>
 
Federal taxes computed at statutory
  rate                                       $79.0   $84.7   $ 99.4
State and local income taxes, net
  of federal benefit                           2.9     4.0      6.5
Impact related to difference in tax
 rates for foreign operations                  2.1    (1.2)    (1.3)
Other                                          (.3)     .4      (.1)
                                             ---------------------- 
Income taxes                                 $83.7   $87.9   $104.5
                                             ======================
Effective tax rate                            37.1%   36.3%    36.8%
                                             ======================
</TABLE>

Earnings from operations of foreign subsidiaries were $35.0 million, $43.9
million, and $45.1 million in 1998, 1997 and 1996, respectively.  At December
31, 1998, no domestic income taxes have been provided on the Company's share of
the undistributed net earnings of corporate investees and overseas operations.
Those earnings totaled $175.4 million, including foreign currency translation
adjustments.  The aggregate amount of unrecognized deferred tax liability is
approximately $8 million at December 31, 1998.

M - Discontinued Operations

On June 9, 1998, the Board of Directors approved a plan to discontinue the
Company's distribution segment.  On July 31, 1998, the Company closed on the
sale of the distribution segment's business, Zellerbach, for approximately $263
million.  During the fourth quarter of 1998, the Company completed the
divestiture of the distribution segment with the sale of remaining real estate
for approximately $25 million.  The financial statements and notes have been
reclassified for all periods presented to reflect this segment as a discontinued
operation.  Revenues of the distribution segment were $965.0 million, $1,553.3
million and $1,585.3 million in 1998, 1997 and 1996, respectively.

                                       40
<PAGE>
 
The following are the components of discontinued operations:

<TABLE> 
<CAPTION> 
Year Ended December 31                     1998       1997      1996
(All dollar amounts in millions)
<S>                                     <C>        <C>         <C> 

Earnings (losses) from operations of
distribution segment, net of income
tax benefit of $3.1 million and $6.6
million in 1998 and 1997 and income
tax expense of $4.5 million in 1996     $  (6.0)   $  (12.9)   $  6.1

Loss on sale of distribution segment
(including loss on operations during
phase-out period of $3.2 million),
net of income tax benefit of $18.2
million                                   (14.4)

Gain on sale of Imaging business,
net of income tax expense of $3.2
million                                                           5.4
                                        -----------------------------
                                        $ (20.4)   $  (12.9)   $ 11.5
                                        =============================
</TABLE> 

N - Pension Plans

The Company has pension plans that cover substantially all employees.  Pension
benefits for bargaining employees are primarily based upon years of credited
service.  Benefits for salaried and other non-bargaining employees are based
upon years of service and the employee's average final earnings.  Mead's funding
policy is to contribute amounts to the plans sufficient to meet or exceed the
minimum requirements of the Employee Retirement Income Security Act.  Effective
December 31, 1998, the Company adopted SFAS No. 132, Employers' Disclosures
About Pensions and Other Postretirement Benefits.

                                       41
<PAGE>
 
Summary information for all of Company's plans is as follows:

<TABLE>
<CAPTION>
December 31                                       1998       1997
(All dollar amounts in millions)
<S>                                            <C>        <C>
 
Change in the projected benefit obligation:
  Projected benefit obligation at beginning
  of year                                      $ (749.9)   $(692.4)
  Service cost                                    (22.0)     (20.9)
  Interest cost                                   (50.7)     (51.0)
  Actuarial loss                                 (105.4)     (56.3)
  Benefits paid                                   123.9       79.2
  Plan amendments                                 (31.0)      (2.6)
  Termination adjustment due to benefit
    enhancements                                   (3.6)      (5.9)
  Settlement adjustment                           (24.0)
  Curtailment adjustment                            8.3
                                               -------------------
Projected benefit obligation at end of year    $ (854.4)   $(749.9)
                                               ===================
Change in the plan assets:
  Fair value of plan assets at beginning of
    year                                       $  978.5    $ 888.7
  Actual return on plan assets                    156.4      164.0
  Employer contributions                           15.8        5.0
  Benefits paid                                  (123.9)     (79.2)
                                               -------------------
Fair value of plan assets at end of year       $1,026.8    $ 978.5
                                               ===================
Plan assets in excess of projected
  benefit obligation                           $  172.4    $ 228.6
Reconciliation of financial status of plans
  to amounts recorded in Mead's balance
  sheets:
     Unamortized prior service cost                28.7       33.4
     Unrecorded effect of net loss(gain)
       arising from differences between
       actuarial assumptions used to
       determine periodic pension expense
       and actual experience                       67.2      (13.1)
     Unamortized plan assets in excess of
       plan liabilities (overfunding) at
       January 1, 1986 - to be recognized
       as a reduction of future years'
       pension expense                            (16.0)     (24.3)
     Adjustment for minimum pension liability                (16.9)
                                               -------------------
Net pension asset                              $  235.4    $ 224.6
                                               ===================
</TABLE>

Amounts recognized in Mead's balance sheets consist of:

<TABLE>
<CAPTION>
                                                   1998       1997
<S>                                              <C>       <C>
  Pension asset                                  $264.3     $237.2
  Other current liabilities                       (28.9)     (12.6)
  Other assets                                      4.8
  Other comprehensive loss                          7.6
 
Benefit obligation discount rate                   6.50%      7.00%
                                                 =================
Rate of compensation increase
  (for pay-related plans only)                     5.25%      5.25%
                                                 =================
</TABLE>

                                       42
<PAGE>
 
The total projected benefit obligation for the Company's pension plans includes
$39.7 million and $31.4 million at December 31, 1998 and 1997, respectively, of
the unfunded plans, of which $26.3 million and $26.3 million represent the
accumulated benefit obligation.

The components of net pension (income) for all pension plans are as follows:

<TABLE>
<CAPTION>
Year Ended December 31                       1998      1997      1996
(All dollar amounts in millions)
<S>                                        <C>       <C>       <C>

Service cost, benefits earned during
 the year                                  $ 22.0    $ 20.9    $ 20.4
Interest cost on projected benefit
 obligation                                  50.7      51.0      49.6
Expected return on plan assets              (86.7)    (78.2)    (77.7)
Amortization of prior service cost            2.8       2.7       1.2
Amortization of unrecognized net (gain)
  loss                                        (.3)       .8       4.5
Amortization of net transition asset         (7.9)     (7.9)     (7.9)
Termination loss                              3.6       2.5       2.4
Settlement loss                              13.3        .7
Curtailment loss                               .4
                                           --------------------------
Net pension (income)                         (2.1)     (7.5)     (7.5)
Less - net pension expense allocated
  to discontinued operations                  7.4       3.3       4.0
                                           --------------------------
Net pension (income) - continuing
  operations                               $ (9.5)   $(10.8)   $(11.5)
                                           ==========================
</TABLE>

The plan assets consist primarily of common stocks and fixed income securities.
The expected long-term rate of return on plan assets used in determining net
pension income was 9% in all years.

The Company's pension plans require the allocation of excess plan assets to plan
members if the plans are terminated, merged or consolidated following a change
in control (as defined) of the Company opposed by the Board of Directors of the
Company.  Amendment of these provisions after such a change in control would
require approval of plan participants.

The Company also has 401(k) plans that cover substantially all U.S. employees.
Expense for Company matching contributions under these plans was approximately
$11.9 million in 1998, $10.3 million in 1997 and $9.4 million in 1996.

O - Postretirement Benefits Other than Pensions

The Company funds certain health care benefit costs principally on a pay-as-you-
go basis, with retirees paying a portion of the costs.  Certain retired
employees of businesses acquired by the Company are covered under other health
care plans that differ from current plans in coverage, deductibles and retiree
contributions.  Effective December 31, 1998, the Company adopted SFAS No. 132,
Employers' Disclosures About Pensions and Other Postretirement Benefits.

                                       43
<PAGE>
 
Summary information on the Company's plans is as follows:

<TABLE>
<CAPTION>
December 31                                           1998      1997
(All dollar amounts in millions)
<S>                                                <C>       <C>
 
Change in the projected benefit obligation:
  Accumulated postretirement benefit
    obligation at beginning of year                $(120.6)  $(114.3)
  Service cost                                        (3.7)     (2.5)
  Interest cost                                       (7.7)     (8.0)
  Actuarial loss                                       (.9)     (8.7)
  Benefits paid                                        8.5       8.5
  Curtailment adjustment                               4.7       4.4
                                                   -----------------
Accumulated postretirement benefit
    obligation at end of year                       (119.7)   (120.6)
                                                   -----------------
Change in the plan assets:
  Fair value of plan assets at beginning
    of year                                            9.1       8.2
  Actual return on plan assets                         1.0        .9
  Employer contributions                               8.5       8.5
  Benefits paid                                       (8.5)     (8.5)
                                                   -----------------
  Fair value of plan assets at end of year            10.1       9.1
                                                   -----------------
Accumulated postretirement benefit obligation
  in excess of plan assets                          (109.6)   (111.5)
Reconciliation of financial status of plans
  to amounts recorded in Mead's balance sheets:
     Unrecorded effect of net (gain) arising
     from differences between actuarial
     assumptions used to determine periodic
     postretirement expense and actual
     experience                                      (14.1)    (16.0)
                                                   -----------------
Accrued postretirement benefit cost -
  included in deferred items                       $(123.7)  $(127.5)
                                                   =================
Benefit obligation discount rate                      6.50%     7.00%
                                                   =================
</TABLE>

                                       44
<PAGE>
 
The components of net periodic postretirement benefit cost are as follows:

<TABLE>
<CAPTION>
Year Ended December 31                      1998    1997    1996
(All dollar amounts in millions)
<S>                                        <C>     <C>     <C>
 
Service cost, benefits attributed to
 employee service during the year          $ 3.7  $  2.5  $  2.4
Interest cost on accumulated
 postretirement benefit obligation           7.6     8.0     8.6
Expected return on plan assets               (.7)    (.6)    (.7)
Curtailment gain                            (4.7)
Amortization of unrecognized net (gain)      (.7)   (1.4)
                                           ---------------------
Net periodic postretirement benefit cost   $ 5.2  $  8.5  $ 10.3
                                           =====================
</TABLE>

Included in net periodic postretirement benefit cost in 1998 is a curtailment
gain of $4.7 million allocated to the Company's discontinued operations.

The expected long-term rate of return on plan assets used in determining the net
periodic postretirement benefit cost was 8% in each year.  The assumed health
care cost trend rate used in measuring the accumulated postretirement benefit
obligation in 1998 was 7.4% declining by .8% per year to an ultimate rate of
5.0%.  The assumed health care trend rates used in 1997 and 1996 were 8.2% and
9.0%, respectively, declining by .8% per year.

If the health care cost trend rate assumptions were increased or decreased by
1%, the accumulated postretirement benefit obligation as of December 31, 1998,
would be increased or decreased by 11.4% and 10.0%, respectively.  The effect of
this change on the sum of the service cost and interest cost components of net
periodic postretirement benefit cost for 1998 would be an increase or decrease
of 9.2% and 7.8%, respectively.

P - Leases

At December 31, 1998, future minimum annual rental commitments under
noncancelable lease obligations are as follows:

<TABLE>
<CAPTION>
                                           Capital  Operating
                                            Leases     Leases
<S>                                        <C>      <C>
Year Ending December 31:
(All dollar amounts in millions)
     1999                                   $ 13.2     $ 29.0
     2000                                     13.1       21.5
     2001                                     11.6       14.3
     2002                                     11.6       11.3
     2003                                     11.6        9.2
     Later years through 2033                586.7       44.8
                                            -----------------
Total minimum lease payments                 647.8     $130.1
                                                       ====== 
Less amount representing interest           (359.5)
                                            ------
Present value of net minimum lease payments  288.3

Less current maturities of capital lease
  obligations                                (1.0)
                                            ------
Capital lease obligations                   $287.3
                                            ======
</TABLE>

                                       45
<PAGE>
 
Capital leases are for manufacturing facilities, equipment and warehouse and
office space.  Capital lease property included in property, plant and equipment
is as follows:

<TABLE>
<CAPTION>
December 31                                1998     1997
(All dollar amounts in millions)
<S>                                      <C>       <C>
 
Land and buildings                        $  1.9   $  4.4
Machinery and equipment                    290.9    195.6
                                          ---------------
                                           292.8    200.0
Less accumulated amortization              (78.3)   (80.5)
                                          ---------------
                                          $214.5   $119.5
                                          ===============
</TABLE>

The majority of rent expense is for operating leases which are for office,
warehouse and manufacturing facilities and delivery, manufacturing and computer
equipment.  A number of these leases have renewal options.  Rent expense was
$51.7 million, $49.8 million and $46.4 million in 1998, 1997 and 1996,
respectively.

Q - Litigation and Other Proceedings

The Company is involved in various litigation generally incidental to normal
operations, as well as proceedings regarding equal employment opportunity
matters, among others.  The Company has also been identified as a potentially
responsible party in at least 20 environmental proceedings.  It is not possible
to determine the ultimate liability, if any, in all these matters.  The Company
has established reserves of $38 million relating to environmental liabilities,
including those related to discontinued operations, which it believes are
probable and reasonably estimable.  The Company believes that it is reasonably
possible that costs associated with these sites may exceed current reserves by
an amount that could range from an insignificant amount to as much as $50
million.  The estimate of this range is less certain than the estimates upon
which reserves are based.  In order to establish this range, assumptions less
favorable to the Company among those outcomes that are considered reasonably
possible were used.  In the opinion of management, after consultation with legal
counsel and after considering established reserves, the resolution of pending
litigation and proceedings is not expected to have a material effect on the
financial condition, results of operations or liquidity of the Company.

R - Additional Information on Cash Flows

<TABLE>
<CAPTION>
Year Ended December 31                1998     1997     1996
(All dollar amounts in millions)
<S>                                 <C>       <C>      <C>  
 
Cash paid during the year for:
 Interest                           $111.3    $90.0    $69.0
  Less amount capitalized             (6.3)    (9.2)    (6.9)
                                    ------------------------
 Interest, net of amount
   capitalized                      $105.0    $80.8    $62.1
                                    ========================
 Income taxes                       $ 31.8    $41.3    $58.8 
                                    ========================
</TABLE>

                                       46
<PAGE>
 
S - Segment Information

Effective March 30, 1998, the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information.

Industry Segments

The Company classifies its businesses into three industry segments.  The Paper
operations manufacture and sell printing, writing, carbonless copy, publishing
and specialty paper primarily to domestic publishers, printers and converters.
The Packaging and Paperboard operations manufacture and sell beverage and food
packaging materials, corrugated shipping containers and paperboard to those
markets primarily located in the United States with other operations conducted
in Europe, Latin America and the Pacific Rim.  The School and Office Products
operations are predominantly domestic and manufacture and distribute school and
office paper related products to retailers.

The Company evaluates performance based on earnings from continuing operations
before income taxes and equity in net earnings of investees.  The accounting
policies of the segments are the same as those described in the summary of
significant accounting policies (Note A).

A comparison of the operations of the Company's businesses based on sales,
earnings from continuing operations before income taxes and identifiable assets
is shown below.

<TABLE>
<CAPTION>
Year Ended December 31                  1998       1997       1996
(All dollar amounts in millions)   
<S>                                   <C>        <C>        <C>
                                   
Net sales:                         
  Industry segments:               
    Paper                             $1,795.6   $1,797.8   $1,434.0
    Packaging and Paperboard           1,494.2    1,431.8    1,371.4
    School and Office Products           482.4      516.2      498.5
                                      ------------------------------
    Total                             $3,772.2   $3,745.8   $3,303.9
                                      ==============================

Earnings (loss) from continuing operations before income taxes:
  Industry segments:
    Paper                             $  206.3   $  195.6   $  194.8
    Packaging and Paperboard             142.5      129.6      138.6
    School and Office Products            42.8       57.3       57.9
  Corporate and other (1)               (166.0)    (140.5)    (107.3)
                                      ------------------------------
Total                                 $  225.6   $  242.0   $  284.0
                                      ==============================  
</TABLE>

                                       47
<PAGE>
 
<TABLE>
<CAPTION>
                                                 1998       1997       1996
<S>                                          <C>        <C>        <C>
Depreciation, depletion and amortization:
  Industry segments:
    Paper                                    $  116.8   $  111.1   $   83.3
    Packaging and Paperboard                    160.9      149.1      141.4
    School and Office Products                    9.1        8.2        8.2
  Corporate and other                            15.0       14.1       11.5
                                             ------------------------------
    Total                                    $  301.8   $  282.5   $  244.4
                                             ==============================
 
Identifiable assets (2):
  Industry segments:
    Paper                                    $2,181.3   $2,113.4   $2,119.5
    Packaging and Paperboard                  1,935.9    1,941.3    1,782.7
    School and Office Products                  229.8      191.3      153.3
    Intersegment Elimination                     (1.4)       (.5)       (.6)
  Corporate and other                           796.6      906.9      851.0
                                             ------------------------------
    Total                                    $5,142.2   $5,152.4   $4,905.9
                                             ==============================
 
Capital expenditures:
  Industry segments:
    Paper                                    $  178.4   $  110.5   $  101.5
 
    Packaging and Paperboard                    169.9      293.8      294.9
    School and Office Products                   10.6       11.6       10.7
  Corporate and other                            25.1       21.4       21.6
                                             ------------------------------
 Total                                       $  384.0   $  437.3   $  428.7
                                             ==============================
</TABLE>

(1) Earnings (loss) from continuing operations before income taxes for
"Corporate and other" includes the following:

<TABLE>
<CAPTION>
Year Ended December 31                           1998       1997       1996
<S>                                           <C>        <C>        <C>
 
Other revenues                                $  11.2    $  13.0    $  10.7
Interest expense                               (109.0)     (98.2)     (57.7)
Other expenses                                  (68.2)     (55.3)     (60.3)
                                              -----------------------------
                                              $(166.0)   $(140.5)   $(107.3)
                                              =============================
</TABLE>

(2) The identifiable assets of "Corporate and other" consist primarily of cash
and cash equivalents, property, plant and equipment, investments, other assets
and net assets of discontinued operations.

Geographic Areas

The Company has sales from foreign subsidiaries primarily in Canada, Europe,
Latin America and the Pacific Rim.  No individual foreign geographic area is
significant to the Company relative to total net sales, earnings from continuing
operations before taxes or identifiable assets.

                                       48
<PAGE>
 
The following represents net sales and total assets of the Company's foreign
subsidiaries:

<TABLE>
<CAPTION>
Year Ended December 31                    1998      1997     1996
(All dollar amounts in millions)
<S>                                   <C>         <C>      <C>
 
Net Sales:
  Europe                                 $307.1   $309.1   $327.5
  Canada                                  139.8    132.3    112.9
  Pacific Rim                              46.9     52.7     56.5
  Latin America                            45.5     40.5     31.6
                                         ------------------------
Total                                    $539.3   $534.6   $528.5
                                         ========================
Assets:
  Europe                                 $230.2   $226.9   $230.7
  Canada                                   50.5     55.0     58.9
  Pacific Rim                              39.4     48.4     63.6
  Latin America                            35.1     35.5     30.0
                                         ------   ------   ------
Total                                    $355.2   $365.8   $383.2
                                         ========================
</TABLE>

                                       49
<PAGE>
 
Selected Quarterly Financial Data (unaudited)
(All dollar amounts in millions, except per share data)

<TABLE> 
<CAPTION> 
                    1st         2nd          3rd        4th
                  Quarter     Quarter      Quarter    Quarter       Year
<S>               <C>        <C>          <C>          <C>        <C> 
Net sales:
    1998          $839.0     $1,050.9     $1,009.3     $873.0     $3,772.2
    1997           829.5      1,001.4      1,031.4      883.5      3,745.8
    1996           711.5        908.8        875.7      807.9      3,303.9
Gross profit:
    1998           178.0        197.5        197.6      149.6        722.7
    1997           157.8        193.7        201.6      184.2        737.3
    1996           160.2        212.5        192.1      160.9        725.7
Earnings from continuing operations:
    1998            33.6         40.2         35.4       30.9        140.1
    1997            24.5         49.6         54.8       34.1        163.0
    1996            30.0         64.5         61.4       27.9        183.8
Net earnings:
    1998            30.6         15.2         35.4       38.5        119.7
    1997            20.2         47.8         50.3       31.8        150.1
    1996            36.3         67.1         62.7       29.2        195.3
Per common share - basic: (1)
  Earnings from continuing operations:
    1998             .32          .39          .34        .30         1.36
    1997             .23          .48          .52        .33         1.56
    1996             .28          .62          .59        .27         1.75
  Net earnings:
    1998             .29          .15          .34        .37         1.16
    1997             .19          .46          .48        .31         1.44
    1996             .34          .64          .60        .28         1.86
Per common share - assuming dilution: (1)
  Earnings from continuing operations:
    1998             .32          .38          .34        .30         1.34
    1997             .23          .47          .51        .32         1.53
    1996             .28          .61          .58        .26         1.73
  Net earnings:
    1998             .29          .14          .34        .37         1.14
    1997             .19          .45          .47        .30         1.41
    1996             .34          .63          .59        .28         1.84
Cash dividends per common share:
    1998             .16          .16          .16        .16          .64
    1997             .15          .15          .15        .16          .61
    1996             .14          .15          .15        .15          .59
</TABLE> 

(1) The number of shares used in the calculation of per share data is computed
    based on quarterly averages; therefore, the sum of individual earnings per
    share may not equal the annual computation.

                                       50
<PAGE>
 
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

Not applicable.


                                   PART III

Item 10.  Directors and Executive Officers of the Registrant

Information pursuant to this item is incorporated herein by reference to pages 3
through 6 and 24 of the Company's Proxy Statement, definitive copies of which
were filed with the Securities and Exchange Commission ("Commission") on March
9, 1999.  Information concerning executive officers is also included in Part I
of this report following Item 4.

Item 11.  Executive Compensation

     Information pursuant to this item is incorporated herein by reference to
pages 9 through 22 of the Company's Proxy Statement (excluding the "Report of
Compensation Committee on Executive Compensation" on pages 11 through 15 and the
"Performance Graph" on page 21), definitive copies of which were filed with the
Commission on March 9, 1999.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

     Information pursuant to this item is incorporated herein by reference to
pages 9 through 11 of the Company's Proxy Statement, definitive copies of which
were filed with the Commission on March 9, 1999.

Item 13.  Certain Relationships and Related Transactions

     Information pursuant to this item is incorporated herein by reference to
page 24 of the Company's Proxy Statement, definitive copies of which were filed
with the Commission on March 9, 1999.


                                    PART IV

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

     (a)  1. Financial Statements

          The financial statements of The Mead Corporation and consolidated
subsidiaries are included in Part II, Item 8.


          2. Financial Statement Schedule

                                                                          Page
                                                                          ----

          Schedule II --Valuation and Qualifying Accounts . . . . . . . .   59

     The information required to be submitted in Schedules I through V for The
Mead Corporation and consolidated subsidiaries has either been shown in the
financial statements or notes thereto, or is not applicable or required under
rules of Regulation S-X, and, therefore, those schedules have been omitted.

                                       51
<PAGE>
 
          3. Exhibits

(3)     Articles of Incorporation and Bylaws:

           (i)  Amended Articles of Incorporation of the Registrant adopted May
        28, 1987 (incorporated by reference to Exhibit (3)(i) of Registrant's
        Annual Report on Form 10-K for the fiscal year ended December 31, 1996).

           (ii)  Regulations of the Registrant, as amended April 25, 1996
        (incorporated by reference to Exhibit (3)(ii) of Registrant's Quarterly
        Report on Form 10-Q for the Quarterly Period ended March 31, 1996).

(4)     Instruments defining the rights of security holders, including
        indentures:

           (i)  Credit Agreement dated as of November 15, 1989 with Bankers
        Trust Company, The First National Bank of Chicago, Morgan Guaranty Trust
        Company of New York and fifteen other banks; Amendment No. 1 thereto
        dated as of November 30, 1991; Amendment No. 2 thereto dated as of May
        1, 1994 (incorporated by reference to Exhibit (10)(1) to Registrant's
        Quarterly Report on Form 10-Q for the Quarterly Period ended July 3,
        1994); Amendment No. 3 thereto dated as of August 31, 1995 (incorporated
        by reference to Exhibit (4)(1) to Registrant's Quarterly Report on Form
        10-Q for the Quarterly Period ended October 1, 1995); Amendment No. 4
        thereto dated as of August 31, 1996 (incorporated by reference to
        Exhibit (4)(i) to Registrant's Quarterly Report on Form 10-Q for the
        Quarterly Period ended September 29, 1996); Amendment No. 5 thereto
        dated as of October 31, 1997 (incorporated by reference to Exhibit
        (4)(i) to Registrant's Annual Report on Form 10-K for the fiscal year
        ended December 31, 1997); and Amendment No. 6 thereto dated as of April
        10, 1998 (incorporated by reference to Exhibit (4)(1) to Registrant's
        Quarterly Report on Form 10-Q for the Quarterly Period ended June 28,
        1998).

           (ii)  Indenture dated as of July 15, 1982 between the Registrant and
        Bankers Trust Company, as Trustee, First Supplemental Indenture dated as
        of March 1, 1987, Second Supplemental Indenture dated as of October 15,
        1989 and Third Supplemental Indenture dated as of November 15, 1991
        (incorporated by reference to Exhibit (4)(ii) to Registrant's Annual
        Report on Form 10-K for the fiscal year ended December 31, 1997).

           (iii)  Indenture dated as of February 1, 1993 between Registrant and
        The First National Bank of Chicago, as Trustee (incorporated by
        reference to Exhibit (4)(iii) to Registrant's Annual Report on Form 10-K
        for the fiscal year ended December 31, 1997).

           (iv)  Indenture dated as of October 20, 1997 between Registrant and
        Citibank, N.A., as Trustee (incorporated by reference to Exhibit 4(g) of
        Registrant's Current Report on Form 8-K dated October 20, 1997).

        The total amount of securities authorized under other long-term debt
        instruments does not exceed 10% of the total assets of the Registrant
        and its subsidiaries on a consolidated basis.  A copy of each such
        instrument will be furnished to the Commission upon request.

                                       52
<PAGE>
 
(10)    Material Contracts:

           (i)  Agreement dated as of April 24, 1964 between Northwood Mills
        Limited, Canamead, Inc., the Registrant and Noranda Mines, Limited and
        Supplemental Agreements relating thereto dated as of July 2, 1964, April
        5, 1965, March 15, 1966, February 1, 1967, December 15, 1970 and April
        1, 1974 (incorporated by reference to Exhibit (10)(i) to Registrant's
        Annual Report on Form 10-K for the fiscal year ended December 31, 1997).

           (ii)  Pulp Purchase Agreement dated as of April 1, 1965 among
        Northwood Pulp Limited, the Registrant, Northwood Mills Ltd. and Noranda
        Mines Limited (incorporated by reference to Exhibit (10)(ii) to
        Registrant's Annual Report on Form 10-K for the fiscal year ended
        December 31, 1997).

           (iii)  Restated Rights Agreement dated as of November 9, 1996 between
        Registrant and  First National Bank of Boston, as Rights Agent,
        (incorporated herein by reference to Registrant's Form 8-A, dated
        November 13, 1996), as amended November 1, 1997 (incorporated by
        reference to Registrant's Form 8-A/A dated November 3, 1997).

           (iv)  Amended Board Purchase Agreement dated as of January 4, 1988
        among the Registrant, Georgia Kraft Company and Inland Container
        Corporation (incorporated by reference to Exhibit (10)(iv) to
        Registrant's Annual Report on Form 10-K for the fiscal year ended
        December 31, 1997).

           (v)  Indemnification Agreement dated as of January 4, 1988 among the
        Registrant, Mead Coated Board, Inc., Temple-Inland Inc., Inland
        Container Corporation I, Inland Container Corporation, GK Texas Holding
        Company and Georgia Kraft Company (incorporated by reference to Exhibit
        (10)(v) to Registrant's Annual Report on Form 10-K for the fiscal year
        ended December 31, 1997).

           (vi)  Lease Agreement between The Industrial Development Board of the
        City of Phenix City, Alabama and Mead Coated Board, Inc., dated as of
        December 1, 1988, as amended (incorporated by reference to Exhibit
        (10)(vi) to Registrant's Annual Report on Form 10-K for the fiscal year
        ended December 31, 1997).

           (vii)  Lease Agreement between The Industrial Development Board of 
        the City of Phenix City, Alabama and Mead Coated Board, Inc., dated as
        of June 1, 1993, as amended (incorporated by reference to Exhibit
        (10)(vii) to Registrant's Annual Report on Form 10-K for the fiscal year
        ended December 31, 1997).

           (viii)  Lease Agreement between The Industrial Development Board of
        the City of Stevenson, Alabama and The Mead Corporation, dated as of
        March 1, 1998 (incorporated by reference to Exhibit (10)(3) to
        Registrant's Quarterly Report on Form 10-Q for the Quarterly Period
        ended March 29, 1998).

        The following are compensatory plans and arrangements in which directors
        or executive officers participate:

           (ix)  1984 Stock Option Plan of the Registrant, as amended and
        restated through November 9, 1996 (incorporated by reference to Exhibit
        (10)(ix) to Registrant's Annual Report on Form 10-K for the fiscal year
        ended December 31, 1996).

                                       53
<PAGE>
 
           (x) 1991 Stock Option Plan of the Registrant, as amended through
        November 9, 1996 (incorporated by reference to Exhibit (10)(x) to
        Registrant's Annual Report on Form 10-K for the fiscal year ended
        December 31, 1996); as amended effective June 24, 1998.

           (xi)  1996 Stock Option Plan of the Registrant as amended through
        November 9, 1996 (incorporated by reference to Exhibit (10)(xi) to
        Registrant's Annual Report on Form 10-K for the fiscal year ended
        December 31, 1996); as amended effective June 24, 1998.

           (xii)  Incentive Compensation Election Plan of the Registrant as
        amended November 17, 1987, as amended October 29, 1988 (incorporated by
        reference to Exhibit (10)(xi) to Registrant's Annual Report on Form 10-K
        for the fiscal year ended December 31, 1997); as amended effective June
        24, 1998.

           (xiii)  1985 Supplement to Registrant's Incentive Compensation
        Election Plan, as amended November 17, 1987, and as further amended
        October 29, 1988 (incorporated by reference to Exhibit (10)(xii) to
        Registrant's Annual Report on Form 10-K for the fiscal year ended
        December 31, 1997); as amended effective June 24, 1998.

           (xiv)  Excess Benefit Plan of the Registrant dated January 1, 1996
        (incorporated by reference to Exhibit (10)(3) to Registrant's Quarterly
        Report on Form 10-Q for the Quarterly Period ended March 31, 1996); as
        amended effective June 24, 1998.

           (xv)  Excess Earnings Benefit Plan of the Registrant dated January 1,
        1996 (incorporated by reference to Exhibit (10)(4) to Registrant's
        Quarterly Report on Form 10-Q for the Quarterly Period ended March 31,
        1996); as amended effective June 24, 1998.

           (xvi)  Restated Supplemental Executive Retirement Plan effective
        January 1, 1997 (incorporated by reference to Exhibit (10)(3) to
        Registrant's Quarterly Report on Form 10-Q for the Quarterly Period
        ended March 30, 1997); as amended effective June 24, 1998.

           (xvii)  Form of Indemnification Agreement between Registrant and each
        of John C. Bogle, John G. Breen, William E. Hoglund, James G. Kaiser,
        Robert J. Kohlhepp, John A. Krol, Susan J. Kropf, Charles S. Mechem,
        Jr., Lee J. Styslinger, Jr., Jerome F. Tatar and J. Lawrence Wilson.

           (xviii)  Form of Severance Agreement between Registrant and each of
        William R. Graber, Elias M. Karter, Raymond W. Lane,  Thomas E. Palmer,
        Jerome F. Tatar and other key employees.

           (xix)  Restated Benefit Trust Agreement dated August 27, 1996 between
        Registrant and Society Bank, National Association (incorporated by
        reference to Exhibit (10)(1) of Registrant's Quarterly Report on Form
        10-Q for the Quarterly Period ended September 29, 1996); as amended
        effective June 24, 1998.

           (xx)  Restricted Stock Plan effective December 10, 1987, as amended
        through November 9, 1996 (incorporated by reference to Exhibit (10)(xxi)
        to Registrant's Annual Report on Form 10-K for the fiscal year ended
        December 31, 1996); as amended June 24, 1998.

           (xxi)  Deferred Compensation Plan for Directors of the Registrant, as
        amended through October 29, 1988 (incorporated by reference to Exhibit
        (10)(xx) to Registrant's Annual Report on Form 10-K for the 

                                       54
<PAGE>
 
        fiscal year ended December 31, 1997); as amended effective June 24,
        1998.

           (xxii)  1985 Supplement to Registrant's Deferred Compensation Plan
        for Directors, as amended through October 29, 1988 (incorporated by
        reference to Exhibit (10) (xxi) to Registrant's Annual Report on Form 
        10-K for the fiscal year ended December 31, 1997); as amended effective
        June 24, 1998.

           (xxiii) Directors Capital Accumulation Plan (incorporated by 
        reference to Exhibit (10)(1) of Registrant's Quarterly Report on Form 
        10-Q for the Quarterly Period ended June 30, 1996); as amended effective
        June 24, 1998.

           (xxiv)  Form of Executive Life Insurance Policy for Key Executives.

           (xxv)  Long Term Incentive Plan effective 1997 (incorporated by
        reference to Exhibit (10)(2) of Registrant's Quarterly Report on Form 
        10-Q for the Quarterly Period ended March 30, 1997).

           (xxvi)  Long Term Incentive Plan effective 1998 (incorporated by
        reference to Exhibit (10)(2) of Registrant's Quarterly Report on Form
        10-Q for the Quarterly Period ended March 29, 1998); as amended
        effective June 24, 1998.

           (xxvii)  Annual Incentive Plan for 1998 (incorporated by reference to
        Exhibit (10)(1) of Registrant's Quarterly Report on Form 10-Q for the
        Quarterly Period ended March 29, 1998); as amended effective June 24,
        1998.

           (xxviii)  Form of Mead Executive Capital Accumulation Plan effective
        January 1, 1995 (incorporated by reference to Exhibit (10)(1) of
        Registrant's Quarterly Report on Form 10-Q for the Quarterly Period
        ended July 2, 1995); amended as of March 1, 1997 (incorporated by
        reference to Exhibit 10(4) to Registrant's Quarterly Report on Form 10-Q
        for the Quarterly Period ended March 30, 1997), amended as of July 1,
        1997 (incorporated by reference to Exhibit (10)(xxvi) to Registrant's
        Annual Report on Form 10-K for the fiscal year ended December 31, 1997);
        as amended effective June 24, 1998.

(21)  Subsidiaries of the Registrant.

(23)  Consent of Independent Auditors.

(27)  Financial Data Schedule

      (b)   Reports on Form 8-K

      No current reports on Form 8-K were filed in the fourth quarter of 1998.

                                       55
<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.

                                   THE MEAD CORPORATION


Date: February 25, 1999            By  /s/ JEROME F. TATAR
                                     ----------------------------------
                                             Jerome F. Tatar
                                          Chairman of the Board,
                                       Chief Executive Officer and
                                                President
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

Date: February 25, 1999            By  /s/ JEROME F. TATAR
                                     ----------------------------------
                                             Jerome F. Tatar
                                      Director, Chairman of the Board,
                                       Chief Executive Officer and
                                                President
 


Date: February 25, 1999            By  /s/ WILLIAM R. GRABER
                                     ----------------------------------
                                             William R. Graber
                                          Vice President and Chief
                                        Financial Officer (principal
                                             financial officer)



Date: February 25, 1999            By  /s/ GREGORY T. GESWEIN
                                     ----------------------------------
                                            Gregory T. Geswein
                                       Vice President and Controller
                                       (principal accounting officer)
 

Date: February 25, 1999            By  /s/ JOHN C. BOGLE
                                     ----------------------------------
                                               John C. Bogle
                                                 Director


Date: February 25, 1999            By  /s/ JOHN G. BREEN
                                     ----------------------------------
                                               John G. Breen
                                                  Director


Date: February 25, 1999            By  /s/ WILLIAM E. HOGLUND
                                     ----------------------------------
                                             William E. Hoglund
                                                  Director

                                       56
<PAGE>
 
Date: February 25, 1999            By  /s/ JAMES G. KAISER
                                     ----------------------------------
                                              James G. Kaiser
                                                  Director


Date: February 25, 1999            By  /s/ ROBERT J. KOHLHEPP
                                     ----------------------------------
                                            Robert J. Kohlhepp
                                                 Director


Date: February 25, 1999            By  /s/ JOHN A. KROL
                                     ----------------------------------
                                               John A. Krol
                                                 Director


Date: February 25, 1999            By  /s/ SUSAN J. KROPF
                                     ----------------------------------
                                              Susan J. Kropf
                                                 Director


Date: February 25, 1999            By  /s/ CHARLES S. MECHEM, JR.
                                     ----------------------------------
                                           Charles S. Mechem, Jr.
                                                 Director


Date: February 25, 1999            By  /s/ LEE J. STYSLINGER, JR.
                                     ----------------------------------
                                           Lee J. Styslinger, Jr.
                                                 Director


Date: February 25, 1999            By  /s/ J. LAWRENCE WILSON
                                     ----------------------------------
                                            J. Lawrence Wilson
                                                 Director

                                       57
<PAGE>
 
              THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES




                        SCHEDULE FURNISHED PURSUANT TO
                           REQUIREMENTS OF FORM 10-K




                 Years Ended December 31, 1998, 1997 and 1996

                                       58
<PAGE>
 
THE MEAD CORPORATION AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(All dollar amounts in millions)

<TABLE>
<CAPTION>
           Column A                  Column B        Column C            Column D    Column E
--------------------------------    ---------   -------------------    -----------   --------

                                                    Additions
                                                ------------------- 

                                                Charged    Charged                   Balance
                                    Balance at     to      to Other                    at
                                    Beginning   Costs &    Accounts -  Deductions -  End of
Description                         of Period   Expenses   Describe    Describe      Period
--------------------------------    ---------   --------   --------    -----------   ------
<S>                                 <C>         <C>        <C>         <C>           <C>
Year Ended December 31, 1998:
Allowance for doubtful accounts       $15.0      $ 5.4       $-0-       $ 3.1 (A)     $17.3  
                                      =====      =====       ====       =====         =====
Reserve for stores and supplies
   inventory                          $ -0-      $10.4       $-0-       $ 1.8 (B)     $ 8.6
                                      =====      =====       ====       =====         =====
Year Ended December 31, 1997:
Allowance for doubtful accounts       $15.1      $ 2.4       $-0-       $ 2.5 (A)     $15.0
                                      =====      =====       ====       =====         =====
Year Ended December 31, 1996:
Allowance for doubtful accounts       $16.9      $  .9       $-0-       $ 2.7 (A)     $15.1
                                      =====      =====       ====       =====         =====
</TABLE>

(A)  Accounts charged off, net of recoveries.
(B)  Amount of reserve written-off.

                                       59
<PAGE>
 
                             THE MEAD CORPORATION





                      EXHIBITS TO FORM 10-K ANNUAL REPORT





                     FOR THE YEAR ENDED DECEMBER 31, 1998

                                       60