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

--------------------------------------------------------------------------------
                                    FORM 10-K
                  Annual Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

--------------------------------------------------------------------------------
For the year ended December 31, 1998           Commission file Number  000-21750

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

Pennsylvania                                                         23-1430030
(State or Other Jurisdiction of                                (I.R.S. Employer
Incorporation or Organization)                               Identification No.)

4350 Haddonfield Road, Suite 222, Pennsauken, N.J.                        08109
(Address of Principal Executive Offices)                              (Zip Code)

                                  (609)488-4888
                          Registrant's Telephone Number


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

None

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

Title of Each Class                   Name of Each Exchange on Which Registered
Common Stock $.01 par value per share                                    Nasdaq


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

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

As of March 24,  1999 the  aggregate  market  value of the voting  stock held by
nonaffiliates was approximately $36.7 million.

As of March 24,  1999 there were  6,536,018  shares of common  stock  issued and
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

The definitive  Proxy Statement to be filed pursuant to Regulation 14A under the
Securities  Exchange Act of 1934 (Item 10- Directors  Only, and Items 11, 12 and
13 of Part III). The index of exhibits is located on page 34 of this document.


<PAGE>



                                     PART I.

Certain  statements  contained in this annual report are  forward-looking.  Such
forward-looking  statements  are  subject  to a  number  of  factors,  including
material  risks,  uncertainties  and  contingencies,  which could  cause  actual
results  to  differ  materially  from  those  set  forth in the  forward-looking
statements.  These risks and uncertainties  include, but are not limited to, the
Company's ability to successfully  implement its business  strategies  including
successfully  integrating business acquisitions,  the effect of general economic
conditions and technological, competitive and other changes in the industry, the
impact of year 2000 issues and other risks and uncertainties as set forth in the
Company's  periodic  reports and other filings with the  Securities and Exchange
Commission.


ITEM I.  BUSINESS

PrimeSource  Corporation (the "Company") is a major national distributor serving
the printing and publishing  industry.  For approximately 135 years, the Company
or its unincorporated predecessor has been servicing this industry. The Company,
which was  incorporated  under the laws of the  Commonwealth  of Pennsylvania in
1954, was acquired as a wholly-owned subsidiary of Tasty Baking Company ("TBC"),
Philadelphia,  Pennsylvania in 1965. On August 1, 1993, TBC spun-off 100% of the
ownership of the Company in a dividend  distribution of the Company common stock
to the  shareholders  of TBC.  As a result,  the Company  became an  independent
publicly-owned company whose shares are traded on the Nasdaq National Market.

The Company has had three  significant  business  combinations  in the past five
years. In 1994,  Momentum  Corporation with sales of approximately  $165 million
merged into the Company. In 1996, the Company acquired five of VGC Corporation's
branch operations with sales of approximately $55 million.  In 1998, the Company
acquired  the  graphic  imaging  group of Bell  Industries,  Inc.  with sales of
approximately  $135  million.  With  these  acquisitions,   the  Company  has  a
significant  presence  in all of the major  markets  in the United  States.  The
Company believes there will be a continuing consolidation of distributors in the
industry and the Company's  business  strategy will continue to include pursuing
such acquisitions which will either expand the Company's presence in key markets
and/or offer new products and services to the printing and publishing industry.

The Company is  headquartered  in  Pennsauken,  New Jersey.  The  operations are
divided into three  geographic  regions.  The Company  maintains a decentralized
management  structure that allows the operating  regions broad discretion in the
conduct of their respective businesses,  including responsibility for management
of suppliers,  customers and  employees.  Management is evaluated  against their
financial and non-financial  goals which are established on an annual basis. The
Company  emphasizes  sales growth as well as return on sales and net assets.  In
order to provide  shareholder  value,  the  Company  believes  it must strive to
maximize its long-term return on capital employed. By quantifying this objective
and applying it at the operating  level,  the Company  believes it can best meet
this goal.  Management  believes that the concept of fostering and  perpetuating
the  entrepreneurial  drive of operating  management  will  continue to be a key
factor in the Company's future success.

The Company  presently  represents  over 500 suppliers,  sells and supports more
than 50,000  products and has a customer  base in excess of 30,000.  No customer
accounted for more than 2% of the Company's net sales in 1998.

The Company  offers  consumables,such  as films,  plates,  blankets,  papers and
chemistries;  scanners, servers, work stations, image setters, computer-to-plate
devices and other digital electronic  equipmentand the applicable software;  and
press,  bindery  and  other  finishing  machinery.   The  Company  is  the  U.S.
distributor for Xeikon, which manufacturers  on-demand and variable data digital
color  printing  systems  and  supplies.  With the  product  range and  in-house
expertise,  the Company feels it is a premiere  provider of printing  solutions.
The printing industry has transitioned and continues to move through a period of
rapid technological change. Accordingly,  the Company's product mix continues to
evolve,  however,  it  remains  positioned  through  both  product  and  process
knowledge to fully service this market.

In addition,  there has been and continues to be a consolidation of the customer
base.  Many  printing  and imaging  customers  want a single  source for design,
pre-press preparation, and printing. Consolidation eliminates duplicate overhead
costs and creates  larger  entities  capable of  supporting  more  sophisticated
management  techniques,  from  strategic  planning  through  actual  production.
Management  expects to  continue to see this  consolidation  of  customers  into
larger operations offering more services to their customers.



<PAGE>


While  the  Company  sells  primarily  the  same  products  as its  competitors,
generally at similar prices,  the Company  attempts to  differentiate  itself by
providing a  value-added  approach  with  products and  training  and  technical
support that can make its customers more  efficient and effective.  In addition,
the  Company's  broad  geographic  presence  provides an  advantage in servicing
regional and national customers.

There are over 300  independent  dealers in the United States  competing in this
industry  with no dealer  accounting  for more  than 15% of the  total  industry
sales.  The  Company  believes  it is one of the  largest  dealers in the United
States in terms of  annual  sales and  covers a  broader  range of  geographical
markets  in the United  States  than any of its  competitors.  The  Company  has
minimal foreign sales or income.

The Company owns several  trademarks and tradenames.  To the extent  trademarks,
tradenames, or patents are significant to the Company's business, they are owned
by the manufacturers the Company represents.

The  Company  has minimal  backlog.  The nature of its  business is such that it
maintains  substantial  inventories in order to supply its customers immediately
upon receipt of an order.  Approximately  30% of the Company's  inventories  are
consigned  at various  customer  locations.  Usage of consigned  inventories  is
monitored  at least  monthly  through  a  physical  inventory  taken by  Company
personnel.

Company management does not believe that compliance with federal, state or local
laws relating to the protection of the environment  will have a material adverse
effect  on  the  Company's   consolidated   financial  position  or  results  of
operations.

The Company employed 870 employees at December 31, 1998.



<PAGE>


<TABLE>
EXECUTIVE OFFICERS OF THE REGISTRANT

<CAPTION>
                                                  BUSINESS EXPERIENCE                                POSITION HELD
NAME                                  AGE          LAST FIVE YEARS                                           SINCE
-------------------------           ------    ----------------------------                   ----------------------
<S>                                   <C>      <C>                                               <C>         
James F. Mullan                       59       President and Chief Executive                           1991-Present
President and                                      Officer of Registrant
Chief Executive Officer

John H. Goddard, Jr.                  51       Executive Vice President                            September, 1994-
Executive Vice President                           of Registrant                                            Present
                                               President, Chief Executive Officer                         1992-1994
                                                   of Momentum Corporation


William A. DeMarco                    53       Vice President and Chief Financial Officer          September, 1994-
Vice President and                                 of Registrant                                            Present
Chief Financial Officer                        Vice President of Finance, Treasurer, and                  1993-1994
                                                   Secretary of Registrant


Barry C. Maulding                     53       Vice President, General Counsel                     September, 1994-
Vice President,                                    and Corporate Secretary                                  Present
General Counsel and                                of Registrant
Corporate Secretary                            Vice President Administration,                             1993-1994
                                               General Counsel and Corporate
                                               Secretary of Momentum Corporation

</TABLE>




<PAGE>


ITEM 2.  PROPERTIES

The locations  and primary use of the physical  properties of the Company are as
follows:


                                                                     Approximate
                                                                          Square
Location                                                                 Footage
--------------------------------------------------------------------------------
Corporate Headquarters
       Pennsauken, NJ                                                      7,400

Distribution/Sales Facilities
       Atlanta, GA (Norcross)                                             23,200
       Birmingham, AL                                                     37,000
       Boston, MA (Hingham)                                               13,500
       Chicago, IL (Itasca)                                               49,600
       Cincinnati, OH                                                     35,000
       Dallas, TX                                                         17,500
       Denver, CO                                                         10,000
       Des Moines, IA (Ankeny)                                            14,000
       Houston, TX (Bellaire)                                             10,300
       Jackson, MS (Richland)                                              6,000
       Kalamazoo, MI                                                      20,000
       Kansas City, KS                                                    16,800
       Lancaster, PA (Lititz)                                             14,000
       Las Vegas, NV                                                       6,000
       Los Angeles, CA                                                    44,900
       Miami, FL (Miramar)                                                14,700
       Milwaukee, WI (New Berlin)                                         16,300
       Minneapolis, MN (Mendota Heights)                                  53,600
       Mobile, AL                                                          5,100
       Nashville, TN                                                      16,000
       New Orleans, LA (Harahan)                                           8,800
       Omaha, NE                                                          15,000
       Orlando, FL                                                        14,400
       Pennsauken, NJ                                                     32,000
       Phoenix, AZ                                                        11,500
       Pittsburgh, PA                                                     10,500
       Portland, OR (Wilsonville)                                          8,800
       Sacramento, CA                                                      7,600
       St. Louis, MO                                                      22,000
       St. Paul, MN                                                       47,000
       San Diego, CA                                                      10,600
       San Jose, CA                                                       21,300
       Seattle, WA (Auburn)                                                8,300




All  of  the  properties  are  held  under  operating  leases,  except  for  the
Birmingham, Des Moines, Minneapolis,  St. Louis and Seattle facilities which are
owned.  Management  believes that the Company's  properties  are generally  well
maintained and adequate for current  operations and foreseeable  expansion.  The
inability of the Company to renew any  short-term  real property lease would not
have a material effect on the Company's results of operations.




<PAGE>


ITEM 3. LEGAL PROCEEDINGS

The  Company  is from time to time  involved  in  litigation  incidental  to the
conduct of its  business.  Management  believes  that none of the  litigation in
which the Company is currently involved would, individually or in the aggregate,
have a material  effect on the  Company's  consolidated  financial  position  or
results of operations and cash flows when resolved in a future period.

The  Company,  along  with many  other  potentially  responsible  parties,  is a
defendant in a  declaratory  action to determine an  allocation of costs for the
investigation  and remediation of a Superfund cleanup site. The Company believes
its insurance will cover any costs incurred in this matter. The Company is also,
in general,  subject to possible loss contingencies pursuant to federal or state
environmental laws and regulations. Although these contingencies could result in
future  expenses or  judgments,  such  expenses or judgments are not expected to
have a material  effect on the  Company's  consolidated  financial  position  or
results of operations.


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

No matter was submitted to a vote of security  holders during the fourth quarter
of the year.


<PAGE>


                                    PART II.

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

The Company's common stock trades on the Nasdaq National Market under the symbol
PSRC.

The following  quarterly  stock price and dividend  information  is provided for
1998 and 1997.

<TABLE>
<CAPTION>
                                             Stock Price        
                            ----------------------------        Cash Dividends
                                  High               Low             Per Share
------------------------------------------------------------------------------
1998
<S>                          <C>              <C>                   <C>       
   First Quarter             $   11.50        $     9.37            $     .045
   Second Quarter                11.50              8.25                  .045
   Third Quarter                  9.75              7.87                  .045
   Fourth Quarter                 8.06              6.25                  .045

1997
   First Quarter             $    8.75        $     7.63             $    .045
   Second Quarter                 8.25              7.00                  .045
   Third Quarter                 10.63              7.63                  .045
   Fourth Quarter                13.00              9.63                  .045

</TABLE>


The payment of future cash  dividends will depend on the level and growth of the
Company's earnings and the Company's needs for cash.

There were approximately 3,300 shareholders of record as of December 31, 1998.

For purposes of computing the aggregate  market value of the voting stock of the
Company held by nonaffiliates, as shown on the cover page of this report, it has
assumed that all the outstanding  shares were held by  nonaffiliates  except for
the shares held by directors and officers of the Company.  However,  this should
not be deemed to constitute an admission  that all directors and officers of the
Company are, in fact,  affiliates  of the  Company,  or that there are not other
persons who may be deemed to be affiliates of the Company.  Further  information
concerning  shareholdings of officers,  directors and principal  shareholders is
included in the Company's  definitive  proxy statement filed with the Securities
and Exchange Commission by April 30, 1999.





<PAGE>


ITEM 6.  SELECTED FINANCIAL DATA 
This information  should be read in conjunction with the Company's  consolidated
financial statements included herein.

<TABLE>
<CAPTION>
                                                                                       Years Ended December 31,
                                         -----------------------------------------------------------------------
(in thousands, except per share amounts)          1998(1)        1997(2)       1996          1995(3)       1994 
----------------------------------------------------------------------------------------------------------------
Statement of Income Data
<S>                                           <C>            <C>           <C>           <C>           <C>        
Net sales                                     $453,047       $414,867      $366,657      $357,077      $238,154
Cost of sales                                  369,844        343,116       301,428       293,790       194,346
---- ----------------------------------------------------------------------------------------------------------
Gross profit                                    83,203         71,751        65,229        63,287        43,808
Operating expenses                              72,820         63,257        57,033        58,615        37,362
---------------------------------------------------------------------------------------------------------------
Income from operations                          10,383          8,494         8,196         4,672         6,446
Interest expense                                (3,605)        (2,913)       (1,915)       (2,235)       (1,113)
Gain on sale of capital lease                                   3,658
Loss on business divestiture                                     (401)
Other income-net                                   297            515           421           441           408
---------------------------------------------------------------------------------------------------------------
Income before provision for income taxes         7,075          9,353         6,702         2,878         5,741
Provision for income taxes                       2,975          3,862         2,788         1,232         2,210
---------------------------------------------------------------------------------------------------------------

Net income                                    $  4,100       $  5,491      $  3,914      $  1,646  $      3,531
===============================================================================================================

Per Share Data
Net income per basic share                        $.63           $.84          $.60          $.25          $.72
Net income per diluted share                       .62            .83           .60           .25           .71
Cash dividends per share                           .18            .18           .18           .38           .45
===============================================================================================================

Balance Sheet Data
Working capital                               $100,252       $ 69,151      $ 67,040      $ 65,168      $ 60,987
Total assets                                   191,047        138,491       134,175       119,804       120,760
Total long-term obligations                     75,205         32,788        36,250        32,202        29,094
Shareholders' equity                            55,611         52,548        48,183        45,572        46,169
===============================================================================================================


<FN>
(1)    Income for 1998,  includes a one-time  restructure  and other  expense of
       $1,050,000  ($634,000  after tax) relating to the  reorganization  of the
       Company into three regions and the integration of an acquisition.

(2)    Income  for  1997,  includes  a charge  to cost of sales  for  $2,300,000
       ($1,381,000  after  tax)  for  the  write-down  of  electronic  equipment
       inventory,  a  $3,658,000  ($2,183,000  after  tax) gain on the sale of a
       capital  lease and a  $401,000  ($241,000  after  tax) loss on a business
       divestiture.

(3)    Income for 1995,  includes a one-time  restructure  expense of $1,315,000
       ($794,000 after tax) relating to the  consolidation of five  distribution
       centers, the realignment of two others, and the centralization of certain
       financial and information services.
</FN>
</TABLE>



<PAGE>



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

 Results of Operations

The following  table sets forth for the years  indicated  certain items from the
accompanying  Consolidated Statements of Income expressed as a percentage of net
sales.
<TABLE>
<CAPTION>

                                                         Years Ended December 31,
                                                       -------------------------
                                                        1998      1997      1996
--------------------------------------------------------------------------------
<S>                                                    <C>       <C>       <C>   
Net sales ........................................     100.0%    100.0%    100.0%
Cost of sales ....................................      81.6      82.7      82.2
--------------------------------------------------------------------------------
Gross profit .....................................      18.4      17.3      17.8
Selling, general and administrative expenses .....      15.2      14.5      14.7
Depreciation and amortization ....................        .6        .6        .7
Provision for doubtful accounts ..................        .1        .2        .2
Restructure and other ............................        .2
--------------------------------------------------------------------------------
Income from operations ...........................       2.3       2.0       2.2
Interest expense .................................       (.8)      (.7)      (.5)
Gain on sale of capital lease ....................                  .9
Loss on business divestiture .....................                 (.1)
Other income-net .................................        .1        .1        .1
--------------------------------------------------------------------------------

Income before provision for income taxes .........       1.6       2.2       1.8
Provision for income taxes .......................        .7        .9        .7
--------------------------------------------------------------------------------
Net income .......................................        .9%      1.3%      1.1%
================================================================================
</TABLE>


COMPARISON OF 1998 TO 1997

In 1998, the Company reported record net sales of $453,047,000. This compares to
net sales of  $414,867,000  in 1997,  an increase of 9%. This sales  increase is
primarily the result of the  acquisition  of Bell  Industries'  Graphic  Imaging
Group ("Bell  acquisition") in September 1998.  Excluding the effect of the Bell
acquisition,  sales of digital  presses had strong growth and  consumable  sales
increased slightly. Sales of electronic prepress systems decreased, which tended
to offset most of the overall internal sales growth.

Excluding one-time items for both years, net income for 1998 was $4,734,000,  or
$.71 per diluted  share,  which was slightly below the  $4,930,000,  or $.74 per
share for 1997.

After a one-time pre-tax  restructure and other charge of $1.05 million recorded
in the fourth quarter due to completing the  integration  process for the recent
acquisition  and aligning the Company into three regions,  the Company  reported
net income in 1998 of $4,100,000, or $.62 per share. This compares to net income
reported in 1997 of $5,491,000 or $.83 per share,  which includes a $3.7 million
gain  on the  sale of a  capital  lease,  a $2.3  million  electronic  equipment
inventory write-down and a $0.4 million loss on a business divestiture.

Gross profit as a percent of sales was 18.4% in 1998  compared to 17.8% in 1997,
before including the effect of the $2.3 million electronic  equipment  inventory
write-down in 1997. The  improvement in 1998 is primarily the result of stronger
margins from systems  sales,  increased  digital press sales with higher margins
and higher margins from the Bell business.  Including the inventory  write-down,
the gross profit percentage in 1997 was 17.3%.

Selling,  general and  administrative  expenses as a percent of sales  increased
from  14.5%  in 1997 to  15.2%  in  1998.  This  increase  is  primarily  due to
additional  personnel  costs  associated  with  electronic  prepress  sales.  In
addition,  the benefits of integrating the Bell acquisition will not occur until
the beginning of 1999.



<PAGE>


In the fourth  quarter of 1998,  the Company  incurred a  restructure  and other
charge of $1.05 million related to  reorganizing  the Company into three regions
and  integrating  the Bell  operations.  The costs  incurred  were for  employee
severances and closure of duplicate  facilities.  We anticipate the savings from
this  reorganization   will  bring  the  percentage  of  selling,   general  and
administrative  expenses to sales to levels  consistent or lower than  preceding
years.

In 1998, the provision for doubtful accounts decreased to $440,000 from $694,000
in 1997. The Company has benefited  from strict credit  policies and the current
strong economy.

Interest  expense  increased from $2,913,000 in 1997 to $3,605,000 in 1998. This
increase is attributable to the debt associated with the Bell acquisition.

In 1997,  the  Company  sold a  capital  lease  for a gain of $3.7  million  and
disposed of a business operation for a loss of $0.4 million. In 1998, there were
no similar disposals.

The effective  income tax rate  increased from 41.3% in 1997 to 42% in 1998. The
higher rate in 1998 is primarily due to  non-deductible  expenses being a higher
percent of income in 1998 compared to 1997. The difference between the effective
tax rates and the  federal  statutory  rate of 34% for both  years is  primarily
attributable to the effect of state income taxes and non-deductible expenses.


COMPARISON OF 1997 TO 1996

Net  income for 1997 was  $5,491,000,  or $.83 per  diluted  share  compared  to
$3,914,000,  or $.60 per share in 1996. There were three significant items which
affected  the results for 1997;  a $2.3  million  inventory  write-down,  a $3.7
million  gain on the  sale of a  capital  lease,  and a $0.4  million  loss on a
business divestiture. Excluding these items, net income for 1997 would have been
a record $4,930,000 ($.74 per share), a 26% increase over 1996 net income.

Net  sales in 1997  were  $414,867,000  compared  to  $366,657,000  in 1996,  an
increase  of  13.1%.  This  sales  increase  is  primarily  the  result  of  the
acquisition  of five VGC  Corporation  locations in 1996, one in August 1996 and
four in  November  1996.  Excluding  the  impact of the VGC  acquisition,  sales
increased modestly.

In  1997,  the  Company  centralized  the  electronic  equipment  inventory.  In
conjunction with this centralization,  the Company expensed $2.3 million to cost
of sales for the write-down of the existing  branch  inventory to current market
value.  This  charge  to cost of sales  resulted  in the  gross  profit  percent
decreasing from 17.8% in 1996 to 17.3% in 1997.  Excluding this charge, the 1997
gross profit percent would have been 17.8%, the same as in 1996.

Selling,  general and  administrative  expenses as a percent of sales  decreased
from 14.7% in 1996 to 14.5% in 1997.  The Company  benefited by the economies of
merging the VGC business into its existing business,  plus the continued efforts
to reduce  costs  within  the  Company.  These  gains were  partially  offset by
additional staffing for systems sales.

Interest  expense  increased from $1,915,000 in 1996 to $2,913,000 in 1997. This
increase is primarily due to the debt associated with the VGC acquisition.

The effective income tax rate decreased from 41.6% in 1996 to 41.3% in 1997. The
lower rate in 1997 is primarily due to  non-deductible  expenses  being a lesser
percent of income in 1997 compared to 1996.


Financial Condition and Liquidity

Cash used in operating  activities  was  $2,302,000  and  $1,795,000 in 1998 and
1997,  respectively.  Cash  provided  by  operations  was  $7,701,000  in  1996.
Excluding the effect of changes in assets and liabilities, the cash provided was
$7.7, $4.9 and $7.2 million for 1998, 1997 and 1996,  respectively.  The Company
believes with the  conversion of the Bell  locations  onto the Company  business
system and an emphasis  on managing  assets,  the  working  capital  levels will
decrease in 1999, resulting in improved cash flows for the year.

Cash flow used by investing  activities was  $45,618,000 and $14,471,000 in 1998
and 1996,  compared to cash  provided by investing  activities  of $3,650,000 in
1997.  The use of capital in 1998 and 1996 was  primarily the result of acquired
businesses. In comparison, in 1997 the Company received $3.2 million on the sale
of a capital  lease.  In the three years,  property and  equipment  expenditures
ranged  between  $1.5 and $1.9  million.  The Company  had no  material  capital
expenditure  commitments at December 31, 1998. Capital expenditures for 1999 are
anticipated to be approximately $2 million.


<PAGE>

Cash  flows  from  financing  activities  were  $47,920,000  provided  in  1998,
$1,855,000  used in 1997, and $6,770,000  provided in 1996. The cash provided in
1998 and 1996 was primarily from additional debt and was used for  acquisitions.
The cash used in 1997 was  primarily for the repayment of debt and was primarily
provided  from the proceeds  from the sale of the capital lease and the business
divestiture.

The Company's  primary source of debt financing is a revolving  credit agreement
with a commitment of $75 million.  In addition,  the Company has an  uncommitted
line  that was $10  million  at the end of the year  and has  subsequently  been
increased to $15 million.  Total borrowings under these lines were $78.3 million
at December 31, 1998. The Company believes these sources of borrowing,  combined
with  cash from  operations,  is  sufficient  to  support  the  current  capital
requirements of the Company.


Procedures for Year 2000 Issues

The Company's  business system will require program  modifications  prior to the
year 2000 for what is commonly referred to as the "Year 2000 Issue".  Similar to
other systems, the system currently  abbreviates the year to a two-digit number.
As currently  programmed,  this  abbreviation  will cause many of the  functions
within the system which are date sensitive to operate  improperly or malfunction
in the year 2000.

The business  system was  initially  installed in 1990.  The system was acquired
from  a  software   manufacturer  and  was  modified  to  meet  certain  Company
requirements. Since the initial installation, the software manufacturer has made
several  upgrades  to the  product,  including  making  the  software  Year 2000
compliant.  Historically,  the Company has elected not to install the  available
system upgrades because of the potential additional  programming costs of making
any  required  changes to the custom  modifications  made.  To become  Year 2000
compliant  and, in  addition,  to take  advantage of other  enhancements  in the
software,  the  Company  has  decided to  install  the  manufacturer's  software
upgrades. In addition,  the Company has contracted with the manufacturer to make
the necessary programming changes required as a result of the Company's separate
custom  modifications to the program. The manufacturer was scheduled to complete
the changes for testing by the Company by the end of January 1999. However, this
date has been extended to the end of February due to meeting  delays between the
Company and the manufacturer as a result of timing conflicts with the conversion
of the Bell locations to the business  system.  Testing and  implementation  are
scheduled to be completed by the end of April.

The Company  believes  it has  allowed  adequate  time,  including  time for any
additional delays, to complete the project prior to the year 2000.  Accordingly,
at this time, the Company has not made any formal contingency plans.

The total  cost of the  system  improvements,  which  incorporate  the Year 2000
compliance,  are  estimated to be $300,000 of which  approximately  $120,000 had
been expended through December 31, 1998. No other significant information system
additions have been postponed as a result of this project.

With regard to potential implications to the Company of suppliers not being Year
2000 compliant, the Company through questionnaires and direct contact with major
suppliers,  is in the process of reviewing  the status of their  compliance.  At
this time,  the Company is not aware of any  compliance  problem with any of its
significant  suppliers  and, in  addition,  the Company has access to  competing
products for nearly any customer's needs.

With regard to the Company's  customer  base,  the Company is not requesting any
specific  information from its customers.  The Company has over 30,000 customers
and does  not  feel  the  potential  exposures  justify  the  cost and  problems
associated with surveying this customer base. The Company does share information
electronically  with certain  customers and is working with these customers with
regard to potential transmission problems.

The Company  recognizes that some electronic  equipment it sold in earlier years
may not be Year 2000 compliant and could result in claims against the Company as
well as the  manufacturer of the equipment.  The Company  believes it would have
several  defenses  to any such  claims,  but it is unable to  estimate  what the
aggregate cost of defending and/or settling such claims would be.

With  regard  to other  areas of  exposure,  the  Company's  facilities  consist
primarily of leased warehouse facilities in large metropolitan areas using local
utilities.  With regard to  communication  lines,  the business system lines are
through a major  supplier  who has  provided  assurances  they will be Year 2000
compliant.  As the Company does not have any  specific  contract  services  with
power companies or other utilities or sophisticated  production equipment, it is
not  subject  to many of the  potential  problems  of  manufacturing  or certain
service environments.  However, due to the interdependence of telecommunication,
power and other  utility  services and the other general  uncertainties  of this
issue, the Company is unable to determine  whether the consequences of Year 2000
failures  will have a material  impact on the Company's  results of  operations,
liquidity or financial condition.




<PAGE>


New Accounting Standards

In June 1998, the Financial  Accounting Standards Board ("FASB") issued SFAS No.
133,  "Accounting  for  Derivative  Instruments  and  Hedging  Activities."  The
Statement  establishes new procedures for accounting for derivatives and hedging
activities  and  supersedes  and  amends a number  of  existing  standards.  The
Statement  is  effective  for fiscal years  beginning  after June 15, 1999.  The
Company  currently uses interest rate swap  agreements  ("swaps") to effectively
fix the interest  rate on a portion of the Company's  floating rate debt.  Under
current  accounting  standards,  no gain or loss is recognized on changes in the
fair  value of these  swaps.  Under  this  statement,  gains or  losses  will be
recognized based on changes in the fair value of the swaps which generally occur
as a result of changes in interest  rates.  The Company is currently  evaluating
the financial impact of adoption of the Statement.  The adoption is not expected
to have a material effect on the Company's  consolidated  results of operations,
financial position or cash flows.


Market Sensitive Instruments and Risk Management

The Company utilizes  derivative  financial  instruments to reduce interest rate
risks.  The Company does not hold or issue financial  instruments for trading or
speculative  purposes.  The counterparty is a major commercial bank. At December
31, 1998, the Company had one derivative financial instrument,  an interest rate
swap  agreement  with a  notional  amount of $17  million.  This swap  agreement
effectively  fixes the interest rate on a like amount of the Company's  floating
rate debt at 6.16% plus the  Company's  LIBOR spread in effect at the time.  The
effective  rate was 7.41% at December 31, 1998.  The swap expires on November 6,
2001.  A 100 basis point  downward  parallel  shift in the yield curve would not
have a material  effect on the  Company's  results of  operations,  liquidity or
financial condition.



<PAGE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
                                    PRIMESOURCE CORPORATION
                                Consolidated Statements of Income

<CAPTION>
                                                                   Years Ended December 31,
                                                    ---------------------------------------
(Thousands of dollars, except per share amounts)           1998          1997          1996
-------------------------------------------------------------------------------------------

<S>                                                  <C>           <C>           <C>       
Net sales ........................................   $  453,047    $  414,867    $  366,657
Cost of sales ....................................      369,844       343,116       301,428
-------------------------------------------------------------------------------------------
Gross profit .....................................       83,203        71,751        65,229
Selling, general, and administrative expenses ....       68,823        60,151        53,748
Depreciation and amortization ....................        2,507         2,412         2,420
Provision for doubtful accounts ..................          440           694           865
Restructure and other ............................        1,050
-------------------------------------------------------------------------------------------
Income from operations ...........................       10,383         8,494         8,196
Interest expense .................................       (3,605)       (2,913)       (1,915)
Gain on sale of capital lease ....................                      3,658
Loss on business divestiture .....................                       (401)
Other income-net .................................          297           515           421
-------------------------------------------------------------------------------------------
Income before provision for income taxes .........        7,075         9,353         6,702
Provision for income taxes .......................        2,975         3,862         2,788
-------------------------------------------------------------------------------------------

Net income .......................................   $    4,100    $    5,491    $    3,914
===========================================================================================

Net income per share
Basic ............................................   $      .63    $      .84    $      .60
Diluted ..........................................          .62           .83           .60
===========================================================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>


<PAGE>


<TABLE>
                                       PRIMESOURCE CORPORATION
                                     Consolidated Balance Sheets

<CAPTION>
                                                                                   December 31,
                                                                       ------------------------
(Thousands of dollars, except share information)                              1998         1997
-----------------------------------------------------------------------------------------------
Assets
Current Assets
<S>                                                                     <C>          <C>       
Trade receivables, less allowances of $3,419 and $1,913, respectively   $   73,602   $   53,861
Other receivables ...................................................        9,973        6,675
Inventories .........................................................       69,111       53,919
Deferred income taxes ...............................................        2,852        2,361
Other ...............................................................          962        1,155
-----------------------------------------------------------------------------------------------
Total Current Assets ................................................      156,500      117,971
Property and equipment, net .........................................       13,123       12,315
Excess of cost over net assets of businesses acquired,
  net of accumulated amortization of $1,958 and $1,435, respectively        17,526        4,217
Deferred income taxes ...............................................        1,567        1,705
Long-term receivables ...............................................          697          824
Other assets ........................................................        1,634        1,459
-----------------------------------------------------------------------------------------------
Total Assets ........................................................   $  191,047   $  138,491
===============================================================================================

Liabilities and Shareholders' Equity
Current Liabilities
Current portion of long-term obligations ............................   $    1,128   $    1,362
Notes payable .......................................................        3,500
Accounts payable ....................................................       33,745       34,045
Book overdraft ......................................................        9,195        5,609
Accrued payroll and benefits ........................................        3,745        3,434
Other accrued liabilities ...........................................        4,935        4,370
-----------------------------------------------------------------------------------------------
Total Current Liabilities ...........................................       56,248       48,820
Long-term obligations, net of current portion .......................       75,205       32,788
Accrued pension and other liabilities ...............................        2,070        2,387
Postretirement benefits other than pension ..........................        1,913        1,948
-----------------------------------------------------------------------------------------------
Total Liabilities ...................................................      135,436       85,943
-----------------------------------------------------------------------------------------------
Commitments and Contingencies
Shareholders' Equity
Common stock, $.01 par value, 24,000,000 shares authorized
6,536,018 and 6,516,620 issued and outstanding, respectively ........           65           65
Additional paid-in capital ..........................................       25,724       25,586
Retained earnings ...................................................       29,822       26,897
-----------------------------------------------------------------------------------------------
Total Shareholders' Equity ..........................................       55,611       52,548
-----------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity ..........................   $  191,047   $  138,491
===============================================================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>


<PAGE>


<TABLE>
                                         PRIMESOURCE CORPORATION
                                   Consolidated Statements of Cash Flows

<CAPTION>
                                                                      Years Ended December 31,
                                                          ------------------------------------
(Thousands of dollars)                                          1998         1997         1996
----------------------------------------------------------------------------------------------
Operating Activities
<S>                                                        <C>          <C>          <C>      
Net income .............................................   $   4,100    $   5,491    $   3,914
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
   Depreciation ........................................       1,957        1,980        1,900
   Amortization ........................................         550          432          520
   Provision for doubtful accounts .....................         440          694          865
   Gain on sale of capital lease .......................                   (3,658)
   Loss on business divestiture ........................                      401
   Restructure and other expense .......................         996
   Other ...............................................        (330)        (391)          28
Changes in assets and liabilities, net of
effects from business combinations/divestitures:
   Receivables .........................................      (1,075)        (574)      (4,751)
   Inventories .........................................       2,388       (7,754)       1,485
   Other current assets ................................         278         (484)         258
   Income taxes ........................................        (668)         100        1,768
   Accounts payable and other accrued liabilities ......     (10,803)       2,255        2,917
   Pension and other postretirement benefits ...........        (135)        (287)      (1,203)
----------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities ....      (2,302)      (1,795)       7,701

Investing Activities
Proceeds from sales of property and equipment ..........         163          565          218
Proceeds from sale of capital lease ....................                    3,151
Purchase of property and equipment .....................      (1,743)      (1,918)      (1,530)
Proceeds from business divestitures ....................                    2,388        2,235
Payments for business acquisitions, net of cash acquired     (43,946)                  (14,394)
(Increase) decrease in long-term receivables ...........         127           71          (33)
Increase in other assets ...............................        (185)        (254)        (732)
Other, net .............................................         (34)        (353)        (235)
----------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities ....     (45,618)       3,650      (14,471)

Financing Activities
Net increase in short-term borrowings ..................       3,500
Proceeds from long-term obligations ....................     144,300       74,600      142,924
Repayment of long-term obligations .....................    (102,429)     (77,048)    (138,532)
Increase in book overdraft .............................       3,586        1,762        3,847
Dividends paid .........................................      (1,175)      (1,172)      (1,211)
Purchase of common stock ...............................                     (106)        (258)
Proceeds from exercise of stock options ................         138          109
----------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities ....      47,920       (1,855)       6,770
----------------------------------------------------------------------------------------------

Net change in cash .....................................        --           --           --
Cash at beginning of year ..............................        --           --           --
----------------------------------------------------------------------------------------------
Cash at end of year ....................................   $    --      $    --      $    --
==============================================================================================

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

<PAGE>


<TABLE>
                                               PRIMESOURCE CORPORATION
                                  Consolidated Statements of Shareholders' Equity


<CAPTION>
                                                Common Stock                                   Unamortized
                                             ($.01 Par Value)       Additional                  Restricted
(Thousands of dollars,                  ------------------------       Paid-in      Retained         Stock
 except share information)                 Shares         Amount       Capital      Earnings        Awards         Total
------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>                 <C>       <C>           <C>              <C>        <C>    
Balance, January 1, 1996 ............    6,527,295           $65       $25,543       $20,036          $(72)      $45,572
Net income ..........................                                                  3,914                       3,914
Cash dividends paid to
   shareholders ($.18 per share) ....                                                 (1,211)                     (1,211)
Shares issued under
   acquisition agreement ............       25,000                         137                                       137
Amortization of restricted
   stock awards .....................                                                                   29            29
Purchase of common stock ............      (37,500)                       (147)         (111)                       (258)
------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 ..........    6,514,795            65        25,533        22,628           (43)       48,183
Net income ..........................                                                  5,491                       5,491
Cash dividends paid to
   shareholders ($.18 per share) ....                                                 (1,172)                     (1,172)
Stock options exercised and related
   tax benefit net of shares received
   as payment upon exercise .........       15,837                         109                                       109
Amortization of restricted
   stock awards .....................                                                                   43            43
Purchase of common stock ............      (14,012)                        (56)          (50)                       (106)
------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 ..........    6,516,620            65        25,586        26,897            --        52,548
Net income ..........................                                                  4,100                       4,100
Cash dividends paid to
   shareholders ($.18 per share) ....                                                 (1,175)                     (1,175)
Stock options exercised and related
   tax benefit net of shares received
   as payment upon exercise .........       19,398                         138                                       138
------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 ..........    6,536,018           $65       $25,724       $29,822           $--       $55,611
========================================================================================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>


<PAGE>


                             PRIMESOURCE CORPORATION
                   Notes to Consolidated Financial Statements




1.       Summary of Significant Accounting Policies

         Basis of Consolidation
         PrimeSource  Corporation  (the  "Company")  is a  national  distributor
         serving  the  printing  and  publishing  industries.  The  consolidated
         financial  statements  include  the  accounts  of the  Company  and its
         wholly-owned  subsidiaries.  All significant intercompany  transactions
         and accounts have been eliminated.

         Cash and Cash Equivalents
         The Company  considers all highly  liquid  temporary  cash  investments
         purchased  with  a  maturity  of  three  months  or  less  to  be  cash
         equivalents.  The  Company's  cash  management  program  utilizes  zero
         balance  accounts.  Accordingly,  in  general,  the Company has none or
         minimal cash balances.  Book overdraft  balances have been reclassified
         to a current liability in the accompanying Consolidated Balance Sheets.

         Inventory Valuation
         Inventories  are  stated  at the  lower  of  cost  or  market.  Cost is
         determined using the last-in, first-out (LIFO) and first-in,  first-out
         (FIFO) methods.

         Property and Equipment 
         Property and equipment are carried at cost.  Costs of major  additions,
         replacements  and  betterments  are  capitalized,  and  maintenance and
         repairs  which do not  extend  the life of the  respective  assets  are
         expensed as incurred.  When property is retired or otherwise  disposed,
         the cost of the property and the related  accumulated  depreciation are
         removed  from the  accounts,  and any  resulting  gains or  losses  are
         reflected  in  current  operations.  Depreciation  is  computed  by the
         straight-line  method  over the  estimated  useful  lives of the assets
         which range from three to ten years for machinery and equipment and ten
         to thirty years for buildings and improvements.

         Capital  leases are  included  under  property and  equipment  with the
         corresponding  amortization  included  in  depreciation.   The  related
         financial   obligations  under  the  capital  leases  are  included  in
         long-term  obligations.  Capital  leases are amortized  over the useful
         lives of the respective assets.

         Long-lived  assets  are  reviewed  for  impairment  whenever  events or
         changes  in  circumstances  indicate  the  carrying  amount  may not be
         recoverable.  If the sum of the expected future undiscounted cash flows
         is less than the carrying amount of the asset, a loss is recognized for
         the difference between the fair value and carrying value of the asset.

         Excess of Cost Over Net Assets of Businesses Acquired
         The  excess of the total  acquisition  cost over the fair  value of net
         tangible assets  acquired (the "goodwill  acquired") is being amortized
         by the straight-line  method over periods ranging from fifteen to forty
         years. The Company's policy is to record an impairment loss against the
         goodwill  acquired in the period  when it is  determined  the  carrying
         amount of the net assets may not be recoverable.  The Company  performs
         this  evaluation  on a quarterly  basis.  This  determination  includes
         evaluation  of  factors  such as current  market  value,  future  asset
         utilization,  business climate and future net cash flows  (undiscounted
         and  without  interest)  expected  to  result  from  the use of the net
         assets.

         Revenue Recognition
         Revenue is recognized  when products are shipped and title is passed to
         the customer.

         Derivative Financial Instruments
         The  Company  utilizes  derivative  financial   instruments  to  reduce
         interest  rate  risks.  The  Company  does not hold or issue  financial
         instruments for trading or speculative purposes.  The counterparty is a
         major  commercial  bank.  Management  believes losses related to credit
         risk are remote. The instruments are accounted for on an accrual basis.
         The net cash amounts paid or received under such agreements are accrued
         and recognized as an adjustment to interest expense.




<PAGE>


         Fair Value of Financial Instruments
         The carrying value of the Company's short-term  financial  instruments,
         such as receivables and notes and accounts  payable,  approximate their
         fair values,  based on the short-term  maturities of these instruments.
         The carrying value of long-term  investments,  consisting  primarily of
         long-term notes receivable, and long-term debt obligations,  consisting
         primarily of revolving credit debt with interest rates based on current
         short-term  market  rates,  approximates  the market value based on the
         estimated  discounted  value of future cash flows at December  31, 1998
         and 1997. The fair value of derivative  financial  instruments is based
         on the quoted settlement cost on the balance sheet date.

         Concentrations of Credit Risk
         Concentrations  of credit risk with  respect to trade  receivables  are
         limited due to a large  customer  base and its  geographic  dispersion.
         Ongoing  credit  evaluations  of  customers'  financial  condition  are
         performed  and,  generally,  no  collateral  is  required.  The Company
         maintains reserves for potential credit losses and such losses have not
         exceeded management's expectations.

         Stock-Based Compensation
         The Company  applies the  intrinsic  value based method  prescribed  in
         Accounting  Principles  Board  Opinion  No. 25 to account  for  options
         granted to employees to purchase common shares.  Statement of Financial
         Accounting  Standards  ("SFAS") No. 123,  "Accounting  for  Stock-Based
         Compensation"  requires that  companies  electing to continue using the
         intrinsic  value method must make pro forma  disclosures  of net income
         and  net  income  per  share  as  if  the  fair-value-based  method  of
         accounting had been applied.

         Pension and Other Postretirement Benefits
         In 1998,  the Company  adopted  SFAS No. 132,  "Employers'  Disclosures
         about  Pensions and Other  Postretirement  Benefits." The provisions of
         SFAS No. 132 revise  employers'  disclosures  about  pensions and other
         postretirement  benefit  plans.  It does not change the  measurement or
         recognition of these plans. It standardizes the disclosure requirements
         for   pensions  and  other   postretirement   benefits  to  the  extent
         practicable.

         Income Taxes
         Income tax  expense  is based on pretax  financial  accounting  income.
         Deferred tax assets and liabilities are recognized for the expected tax
         consequences of temporary  differences  between the tax basis of assets
         and liabilities and their reported amounts.

         Net Income Per Common Share
         Basic net income per share is computed  by  dividing  net income by the
         weighted-average number of common shares outstanding during the period.
         Diluted net income per share is computed by dividing  net income by the
         weighted-average  number of common shares outstanding during the period
         adjusted for the number of shares that would have been  outstanding  if
         the dilutive potential common shares had been issued.

         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 disclosure of contingent  assets and liabilities at the
         date of the financial  statements and the reported  amounts of revenues
         and expenses during the reporting  period.  Actual results could differ
         from those estimates.

         Reclassifications
         Certain  reclassifications  of prior  years'  amounts have been made to
         conform to the current year's presentation.


2.       Business Acquisitions
         In  September  1998,  the  Company  acquired  the  net  assets  of Bell
         Industries'  Graphic Imaging Group ("Bell  acquisition")  with thirteen
         locations in the West,  Southwest and Midwest for  approximately  $42.5
         million.  The excess of the  acquisition  costs  over the net  tangible
         assets  acquired is included in the  Consolidated  Balance Sheet and is
         being  amortized on a straight-line  basis over 20 years.  Assuming the
         acquisition  had  occurred  at the  beginning  of the  year,  unaudited
         pro-forma  sales and net income for the year ended  December  31, 1998,
         would have been approximately $552.7 million and $4.8 million ($.73 per
         basic share and $.72 per  diluted  share),  respectively.  For the year
         ended  December 31,  1997,  unaudited  pro-forma  sales and net income,
         would have been approximately $571.2 million and $5.9 million ($.90 per
         basic  share  and $.88 per  diluted  share),  respectively.  The  sales
         decrease  between  1997 and  1998  reflects  reduced  sales in the Bell
         business.


<PAGE>

         In April 1998,  the  Company  acquired  the assets of Joseph  Genstein,
         Inc., a graphics  distributor in the Pittsburgh area, for approximately
         $1.5  million,  with an additional  $100,000  payable after one year if
         certain  sales  levels  are met.  In 1996,  the  Company  acquired  the
         operating  assets of KPM, a graphics  distributor in Michigan,  and VGC
         Corporation's  branch operations in St. Louis,  Missouri;  Minneapolis,
         Minnesota;  Milwaukee, Wisconsin; Des Moines, Iowa; and Omaha, Nebraska
         for an aggregate  purchase price of  approximately  $14.4 million.  The
         excess of the  acquisition  costs over the net tangible assets acquired
         for these  acquisitions is included in the  Consolidated  Balance Sheet
         and is being  amortized  on a  straight-line  basis over 15 years.  The
         pro-forma  results  of  these   acquisitions   would  not  have  had  a
         significant impact on the Company's consolidated results of operations.

         These   acquisitions   have  been   accounted  for  as  purchases  and,
         accordingly,   are  included  in  operations   from  their   respective
         acquisition dates.


3.       Restructure and Other
         In the fourth quarter of 1998, the Company  reorganized  the operations
         into three  regions.  This included  integrating  the Bell  acquisition
         operations  into  the  applicable   regions  and,  where   appropriate,
         combining Bell facilities with existing  PrimeSource  facilities in the
         area. In conjunction  with this  reorganization,  the Company  incurred
         $1,050,000 in restructure  and other expenses  composed of $600,000 for
         employee  severance  compensation  for 36  employees,  $350,000  in the
         write-down  of a building to be sold in 1999 to net  realizable  value,
         and $100,000 for lease costs on vacated leased facilities.  At December
         31, 1998, $54,000 of the severance compensation had been paid.


4.       Sale of Capital Lease

         In October 1997, the Company sold its rights to a building lease in the
         Los  Angeles  California  area  for  $3,151,000.  The  lease  had  been
         accounted for as a capital  lease.  The pretax gain on the sale,  after
         eliminating  the associated net financial  basis of the lease assets of
         $695,000 and the liability for future lease payments of $1,202,000, was
         $3,658,000. Subsequent to the sale, the Company's operations previously
         located in the  facility  were moved to a new  leased  facility  in the
         area.


5.       Business Divestitures

         In  1997,  the  Company  completed  the  sale of a  pressroom  material
         converting  operation.  The pretax  loss on the sale was  $401,000.  In
         conjunction  with  the  sale,  the  Company  entered  into  a  supplier
         agreement with the buyer. In 1996, the Company sold  substantially  all
         of the assets of its  Rochester,  New York  subsidiary,  Onandaga Litho
         Supply, Co., Inc. There was no gain or loss on this sale.


6.       Cash Flow Information

         Cash  payments  for interest and income taxes (net of refunds) for the
         years ended December 31, consisted of:
   
<TABLE>
<CAPTION>
        (Thousands of dollars)                       1998         1997         1996
         --------------------------------------------------------------------------

<S>                                                <C>          <C>          <C>   
         Interest ..........................       $3,368       $2,742       $1,826
         Income taxes ......................        3,760        3,878        2,314
         ==========================================================================
</TABLE>


         Excluded from the  accompanying  Consolidated  Statements of Cash Flows
         for years  ended  December  31,  are the  following  effects of certain
         non-cash investing and financing activities:

<TABLE>
<CAPTION>
         (Thousands of dollars)                     1998        1997           1996
         --------------------------------------------------------------------------

<S>                                               <C>            <C>        <C>    
         Fair value of assets acquired .....      $55,314        $--        $14,801
         Liabilities assumed or created ....       11,368                       407
         ==========================================================================
</TABLE>




<PAGE>


7.       Inventories

          Inventories,  which are  primarily  finished  goods,  at December  31,
          consisted of:

<TABLE>
<CAPTION>
         (Thousands of dollars)                 1998         1997
         --------------------------------------------------------

<S>                                          <C>          <C>    
         Last-in, first-out (LIFO) ....      $33,631      $30,168
         First-in, first-out (FIFO) ...       35,480       23,751
         --------------------------------------------------------
         Total inventories ............      $69,111      $53,919
         ========================================================
</TABLE>

         The current  replacement  costs of inventories  exceeds LIFO values by
         approximately $5,660,000 and $5,432,000 at December 31, 1998 and 1997,
         respectively.

         In 1997,  the Company  expensed $2.3 million to  write-down  electronic
         equipment  inventory  to current  market  value.  This  amount has been
         recorded in cost of sales in the Consolidated Income Statements.


8.       Property and Equipment
         Property and equipment, net, at December 31, consisted of:

<TABLE>
<CAPTION>
         (Thousands of dollars)                                     1998         1997
         ----------------------------------------------------------------------------

<S>                                                             <C>           <C>    
           Land ...........................................     $  1,354      $ 1,354
           Buildings and improvements .....................        7,731        7,605
           Leased property ................................          399          399
           Machinery, equipment and other .................       14,623       12,460
         ----------------------------------------------------------------------------
                                                                  24,107       21,818
           Less accumulated depreciation and amortization .      (10,984)      (9,503)
         ----------------------------------------------------------------------------
         Property and equipment, net ......................     $ 13,123      $12,315
         ============================================================================
</TABLE>


9.       Debt Obligations

         The long-term obligations of the Company at December 31, consisted of:

<TABLE>
<CAPTION>
         (Thousands of dollars)                                               1998         1997  
         --------------------------------------------------------------------------------------

<S>                                                                        <C>          <C>    
         Revolving credit agreement .................................      $74,800      $31,500
         Term loan (interest rate of 6.03%), principal payments of
           $167 plus interest due quarterly through January, 2000 ...          667        1,333
         Term loan (interest rate of 6.03%), principal payments of,
           $134 plus interest due quarterly through January, 2000 ...          535        1,070
         Other miscellaneous obligations ............................          331          247
         --------------------------------------------------------------------------------------
                                                                            76,333       34,150
         Less current portion .......................................       (1,128)      (1,362)
         --------------------------------------------------------------------------------------
         Net long-term obligations ..................................      $75,205      $32,788
         ======================================================================================
</TABLE>

         Maturities of long-term  obligations are $1,128,000 in 1999,  $405,000
         in 2000, $74,800,000 in 2001 and none thereafter.

         The  Company  has an  uncollateralized  $75  million  revolving  credit
         agreement  which  expires  in  January  2001.  Under  the  terms of the
         agreement,  which includes  three banks,  the Company can borrow at the
         prime rate or the London  Interbank  Offered  Rate (LIBOR) plus between
         .50% to 1.70% depending on certain specified performance levels.

         The Company has an  uncommitted  line with a bank for $10  million,  of
         which $3.5 million was  outstanding  at December 31, 1998. The weighted
         average  interest  rate for 1998,  which is based on an  internal  rate
         established by the bank, was 7%.  There were no outstanding balances on
         this line in 1997 or 1996.


<PAGE>

         The loan agreements provide,  among other terms,  various  requirements
         for tangible net worth and leverage and fixed charge  coverage  ratios.
         As a result of the debt incurred with the Bell acquisition, the Company
         was not in compliance  with a leverage  ratio at December 31, 1998. The
         lender has waived the violation and amended the  requirement for future
         periods to incorporate the effect of the Bell acquisition.

         In November  1997,  the  Company  entered  into an  interest  rate swap
         agreement  with a notional  amount of $17 million.  This swap agreement
         effectively  fixed the interest  rate on a like amount of the Company's
         floating rate debt at 6.16% plus the  Company's  LIBOR spread in effect
         at the time.  The  effective  rate was 7.41% at December 31, 1998.  The
         swap expires on November 6, 2001. The fair value of the swap agreement,
         based on the quoted  settlement  cost to close the contract at December
         31,  1998,  is a  liability  of  $490,000.  The fair  value of the swap
         agreement is not recognized in the  consolidated  financial  statements
         since it is accounted for as a hedge.

         Under  terms  of  certain   insurance   policies  and  claims  handling
         agreements, the Company is required to maintain certain standby letters
         of credit. At December 31, 1998 and 1997, these totaled $200,000.


10.      Provision for Income Taxes

         The income tax provision for the years ended December 31, consisted of:

<TABLE>
<CAPTION>
         (Thousands of dollars)             1998         1997         1996
         -----------------------------------------------------------------
         Current:
<S>                                       <C>          <C>          <C>   
         Federal ..................       $2,450       $3,349       $2,571
         State ....................          644          791          586
         -----------------------------------------------------------------
                                           3,094        4,140        3,157
         Deferred:
         Federal ..................          (93)        (229)        (264)
         State ....................          (26)         (49)        (105)
         -----------------------------------------------------------------
                                            (119)        (278)        (369)
         -----------------------------------------------------------------
         Provision for income taxes       $2,975       $3,862       $2,788
         =================================================================
</TABLE>

         Reconciliation  of the  provision  for  income  taxes  computed  at the
         federal  statutory rate of 34% to the actual provision for income taxes
         for the years ended December 31, consisted of:

<TABLE>
<CAPTION>
         (Thousands of dollars)                                     1998         1997         1996
         -----------------------------------------------------------------------------------------
<S>                                                               <C>          <C>          <C>   
         Statutory tax provision .............................    $2,406       $3,180       $2,279
         State income taxes, net of federal income tax benefit       408          490          334
         Expenses for which there are no tax benefits ........       190          172          154
         Other, net ..........................................       (29)          20           21
         -----------------------------------------------------------------------------------------
         Provision for income taxes ..........................    $2,975       $3,862       $2,788
         =========================================================================================
</TABLE>

         Deferred  income  taxes  represent  the  future  tax   consequences  of
         differences  between the tax basis of assets and  liabilities and their
         financial reporting amounts at each year-end. Significant components of
         the  Company's  deferred  tax  assets  (liabilities)  at  December  31,
         consisted of:

<TABLE> 
<CAPTION>
         (Thousands of dollars)                                 1998        1997
         -----------------------------------------------------------------------
<S>                                                           <C>         <C>   
         Inventory reserves .............................     $  712      $  890
         Pension and employee benefit costs .............        774         772
         Provision for doubtful accounts ................        764         677
         Postretirement benefits other than pensions ....        758         867
         Vacation accrual ...............................        434         276
         Goodwill .......................................        313         267
         Depreciation ...................................       (422)       (408)
         Other, net .....................................      1,086         725
         -----------------------------------------------------------------------
         Total deferred tax assets ......................     $4,419      $4,066
         =======================================================================
</TABLE>




<PAGE>


11.      Net Income Per Share

         The following is a reconciliation of the average shares of common stock
         used to  compute  basic  net  income  per share to the  shares  used to
         compute  diluted  net  income  per  share as shown on the  Consolidated
         Statements of Income for the years ended December 31:


<TABLE>
<CAPTION>
                                                                  1998         1997         1996
         ----------------------------------------------------------------------------------------
         Average shares of common stock outstanding
<S>                                                          <C>          <C>          <C>      
         used to compute basic net income per share .....    6,526,805    6,509,083    6,538,279
         Dilutive effect of stock options ...............      122,611      126,751       19,710
         ---------------------------------------------------------------------------------------
         Average shares of common stock outstanding
         used to compute diluted net income per share ...    6,649,416    6,635,834    6,557,989
         ---------------------------------------------------------------------------------------
         Net income per share:
         Basic ..........................................        $ .63        $ .84        $ .60 
         Diluted ........................................          .62          .83          .60 
         =======================================================================================
</TABLE>

         In 1998,  additional option to purchase 254,556 shares of common stock
         at a range of prices  from $6.81 to $11.18 were  outstanding  but were
         not  included in the  computation  of the diluted net income per share
         amount  because the  options'  exercise  prices were  greater than the
         average market price of the common stock.

12.      Defined Benefit Pension Plan

         The Company has a defined  benefit  pension plan  ("Plan")  that covers
         substantially all of the Company's  employees.  In general, an employee
         becomes vested after completing five years of service,  and the benefit
         is based on the employee's years of service and compensation during the
         ten years preceding retirement.  Contributions to the Plan are based on
         funding  standards   established  by  the  Employee  Retirement  Income
         Security Act of 1974.

         The  components  of the net pension  expense  (benefit)  for the years
         ended December 31, were:

<TABLE>
<CAPTION>
         (Thousands of dollars)                                    1998         1997         1996   
         ----------------------------------------------------------------------------------------
<S>                                                            <C>          <C>          <C>     
         Service cost of benefits earned during the year .     $    982     $    728     $  1,000
         Interest cost on projected benefit obligation ...        1,872        1,734        1,718
         Expected return on Plan assets ..................       (2,980)      (2,524)      (2,284)
         Amortization of prior service cost ..............           (9)          (9)          (9)
         Transition amortization .........................            5            5            5
         Recognized net actuarial (gain) loss ............          (88)        (124)          27
         ----------------------------------------------------------------------------------------
         Net pension expense (benefit) ...................     $   (218)    $   (190)    $    457
         ========================================================================================

         Assumptions:
         Discount rate ...................................         6.50%        7.00%        7.75%
         Expected return on Plan assets ..................        10.00%       10.00%       10.00%
         Rate of compensation increase ...................         4.00%        4.00%        4.00%
         ========================================================================================
</TABLE>



<PAGE>


         The change in the financial  status of the Plan and amounts  recognized
         in the Company's Consolidated Balance Sheets at December 31, were:

<TABLE>
<CAPTION>
         (Thousands of dollars)                                   1998         1997
         --------------------------------------------------------------------------
         Change in benefit obligation:
<S>                                                            <C>          <C>    
         Benefit obligation at beginning of year ........      $26,689      $25,244
         Service cost ...................................          982          728
         Interest cost ..................................        1,872        1,734
         Actuarial gain .................................        2,627          308
         Benefits paid ..................................       (1,365)      (1,325)
         --------------------------------------------------------------------------
         Benefit obligation at end of year ..............       30,805       26,689
         --------------------------------------------------------------------------

         Change in Plan assets:
         Fair value of Plan assets at beginning of year .       30,507       25,886
         Actual return on Plan assets ...................        6,953        5,930
         Employer contribution ..........................           16           16
         Benefits paid ..................................       (1,365)      (1,325)
         --------------------------------------------------------------------------
         Fair value of Plan assets at end of year .......       36,111       30,507
         --------------------------------------------------------------------------

         Funded Status ..................................        5,306        3,818
         Unrecognized net gain ..........................       (6,354)      (5,096)
         Unrecognized prior service cost ................         (209)        (218)
         Unrecognized transition obligation .............           14           18
         --------------------------------------------------------------------------
         Net pension asset (liability) ..................      $(1,243)     $(1,478)
         ==========================================================================
</TABLE>

         The Plan's assets are invested in undivided  interests in several funds
         structured  to  duplicate  the  performance  of various  stock and bond
         indexes.


13.      Defined Contribution Pension Plans

         The Company sponsors a number of defined  contribution pension plans in
         the form of IRC 401(k)  plans.  Participation  in one of these plans is
         available to  substantially  all employees.  Company  contributions  to
         these plans are based on a percentage of the employee contributions not
         to exceed certain maximum levels. The cost of these plans was $290,000,
         $296,000 and $220,000 for the years 1998, 1997, and 1996, respectively.


14.      Postretirement Benefits Other Than Pensions

         The Company has two retiree health benefit plans, the Phillips & Jacobs
         Retiree  Health Plan (the "P/J  Retiree  Plan") that  primarily  covers
         retirees and employees who previously  participated  in theTasty Baking
         Company's  Retiree  Medical Plan prior to the  Company's  spin-off from
         Tasty Baking  Company in 1993,  and the Momentum  Retiree  Medical Plan
         (the  "Momentum  Retiree  Plan"),  that primarily  covers  retirees and
         employees who were previously employed by Momentum Corporation prior to
         the merger with the  Company in 1994.  Both plans  provide  health care
         benefits through a health care  administrator and contracts with health
         service  providers.  In addition,  the P/J Retiree Plan  provides  life
         insurance  benefits  through an  insurance  company.  The Company  life
         insurance  premium  contribution  is limited to $20,000 of coverage per
         retiree,  with the retiree  paying the premium for any coverage  beyond
         the $20,000.  The Company's policy is to fund the plans as benefits are
         paid.

         The plans are contributory with ceilings on the Company's contribution.
         In addition,  under the Momentum Retiree Plan, employees who were under
         the age of 55 on December  31, 1992  receive no  contribution  from the
         Company under the plan.

         Net  postretirement  benefit  expense  (benefit)  for the years  ended
         December 31, included the following components:

<TABLE>
<CAPTION>
         (Thousands of dollars)                                      1998         1997         1996
         ------------------------------------------------------------------------------------------
<S>                                                                  <C>         <C>         <C>   
         Service cost of benefits earned during the year ...         $ 20        $  16       $   17
         Interest cost on projected benefit obligation .....           80           89           86
         Recognized actuarial gain .........................          (76)        (103)        (107)
         ------------------------------------------------------------------------------------------
         Net expense (benefit) .............................         $ 24         $  2       $   (4)
         ==========================================================================================
</TABLE>
<PAGE>


         The change in the financial  status of the Plan and amounts  recognized
         in the Company's Consolidated Balance Sheets at December 31, were:

<TABLE>
<CAPTION>
         (Thousands of dollars)                             1998         1997
         ---------------------------------------------------------------------
         Change in benefit obligation:
<S>                                                      <C>          <C>    
         Benefit obligation at beginning of year .....   $ 1,160      $ 1,052
         Service cost ................................        20           16
         Interest cost ...............................        80           89
         Actuarial gain ..............................       325          212
         Benefits paid ...............................       (59)        (209)
         --------------------------------------------------------------------
         Benefit obligation at end of year ...........     1,526        1,160
         --------------------------------------------------------------------

         Plan assets .................................       --           --
         --------------------------------------------------------------------

         Funded Status ...............................    (1,526)      (1,160)
         Unrecognized net gain .......................      (387)        (788)
         --------------------------------------------------------------------
         Net pension asset (liability) ...............   $(1,913)     $(1,948)
         ====================================================================

<FN>
         Assumptions:
         Discount rate
         ---------------
          1998     6.50%
          1997     7.00%
          1996     7.75%
         Medical Trend
         --------------
          Indemnity Plan                  7.23% in 1998 grading to 5% in 2003
          HMO                             6.91% in 1998 grading to 5% in 2005
</FN>
</TABLE>

         Due to the ceilings on Company  contributions,  the effect of increases
         in health  care cost trend  rates do not have a material  effect on the
         liability or expense.


15.      Stock Compensation
         Stock Options
         The Company's  stock  incentive plans provide for the awarding of stock
         options to  directors,  officers and other key  employees.  All granted
         options,  which vest over a four year  period,  lapse at the earlier of
         the  expiration  of the  option  term (not more than ten years from the
         grant  date)  or  within  three  months  following  the  date on  which
         employment with the Company terminates.

         Changes in options  outstanding  for the three years ended December 31,
         1998 are:
<TABLE>
<CAPTION>
                                                                       Option Prices
                                                               -------------------------
                                                                Weighted
                                                     Options     Average           Range
         -------------------------------------------------------------------------------
<S>                                                  <C>          <C>        <C>  
         Outstanding at January 1, 1996 .......      423,443      $ 9.74     $5.92-13.03
         -------------------------------------------------------------------------------
         Granted ..............................      344,756        6.30      6.11- 6.97
         Canceled .............................     (303,350)      11.04      5.92-13.03
         -------------------------------------------------------------------------------
         Outstanding at December 31, 1996 .....      464,849        6.34      6.11- 8.06
         -------------------------------------------------------------------------------
         Granted ..............................       56,500       11.18           11.18
         Exercised ............................      (15,853)       6.15      6.11- 6.97
         Canceled .............................       (7,115)       6.15      6.11- 6.97
         -------------------------------------------------------------------------------
         Outstanding at December 31, 1997 .....      498,381        6.89      6.11-11.18
         -------------------------------------------------------------------------------

         Granted ..............................      101,500       7.41       6.81-11.18
         Exercised ............................      (20,194)      6.25       6.11- 6.97
         Canceled .............................      (16,085)      7.58       6.11-11.18
         -------------------------------------------------------------------------------
         Outstanding at December 31, 1998 .....      563,602     $ 6.99      $6.11-11.18
         -------------------------------------------------------------------------------
</TABLE>

         At December 31, 1998,  there were 255,874  options  exercisable  with a
         weighted-average option price of $6.63 and a range from $6.11 to $11.18
         and 33,940 options available for grant. The weighted-average  remaining
         contractual  life of outstanding  options at December 31, 1998 and 1997
         was 7.3 and 7.7 years, respectively.
<PAGE>

         The Company has not recognized  compensation expense in connection with
         stock option grants. Had compensation  expense been determined based on
         the fair value on the grant date of options  granted after December 31,
         1994,  the Company's net income and net income per share on a pro forma
         basis  would have been  reduced  for the years  ended  December  31, as
         follows:

<TABLE>
<CAPTION>
         (Thousands of dollars, 
          except per share data)                      1998         1997         1996
         ---------------------------------------------------------------------------

         Net Income:
<S>                                                 <C>          <C>          <C>   
         As reported ........................       $4,100       $5,491       $3,914
         Pro forma ..........................        3,917        5,360        3,813
         ===========================================================================
         Net Income Per Share:
         As reported
           Basic ............................         $.63         $.84         $.60
           Diluted ..........................          .62          .83          .60
         Pro forma
           Basic ............................          .60          .82          .58
           Diluted ..........................          .59          .81          .58
         ===========================================================================
</TABLE>

         The  weighted-average  fair  value per share for  options  granted  was
         $2.50, $5.23 and $2.51 for 1998, 1997 and 1996, respectively.  The fair
         value was estimated using the Black-Scholes  option-pricing  model. For
         options granted in 1998, a dividend yield rate of 2.5%,  expected stock
         volatility  of 32% and risk-free  interest rate of 5.4% were used.  For
         options granted in 1997, a dividend yield rate of 1.6%,  expected stock
         volatility  of 45% and  risk-free  interest  rate of 5.8%  were used in
         estimating  the value.  For options  granted in 1996, a dividend  yield
         rate of 2.6%,  expected stock volatility of 37% and risk-free  interest
         rate of 6.75%  were used in  estimating  the value.  For all years,  an
         expected option life of seven years was used.  Restricted  Stock Awards
         The  Company's  stock  incentive  plans  provide  for the  awarding  of
         restricted  stock to officers and key employees.  The fair market value
         of the stock at the date of grant  establishes the compensation  amount
         that is  amortized  to  operations  over  the  restriction  period.  At
         December 31, 1998, all awards were fully amortized an additional 61,280
         shares were available for future awards.


16.      Leases

         The  Company  leases  certain   distribution  and  office   facilities,
         machinery  and  equipment,   and  automotive  equipment  under  various
         noncancelable lease agreements.  The Company expects that in the normal
         course of  business,  leases that expire will be renewed or replaced by
         other leases.

          Minimum annual rentals payable under  noncancelable  operating  leases
          with a remaining term of more than one year from December 31, 1998 are
          as follows:

<TABLE>
<CAPTION>
         Years Ending December 31,
         (Thousands of dollars)                                                                                    
         -------------------------------------
<S>                                     <C>   
          1999 .......................  $2,197
          2000 .......................   1,852
          2001 .......................   1,071
          2002 .......................     720
          2003 .......................     352
          Thereafter .................     187
         -------------------------------------
         Total minimum lease payments   $6,379
         =====================================
</TABLE>
   
         Rent expense, net of noncancelable sublease income of $10,000, none and
         $5,000  in  1998,  1997,  and  1996,   respectively,   was  $2,851,000,
         $2,219,000 and $2,182,000 for 1998, 1997, and 1996, respectively.

         The Company  leases a distribution  facility from two  employees.  Rent
         expense  incurred in connection with this lease was $65,000 in 1998 and
         1997 and $63,000 in 1996.




<PAGE>


17.      New Accounting Standards

         In June 1998, the Financial  Accounting Standards Board ("FASB") issued
         SFAS No.  133,  "Accounting  for  Derivative  Instruments  and  Hedging
         Activities."  The Statement  establishes  new procedures for accounting
         for  derivatives  and hedging  activities  and  supersedes and amends a
         number of existing  standards.  The  Statement is effective  for fiscal
         years  beginning  after  June 15,  1999.  The  Company  currently  uses
         interest rate swap agreements ("swaps") to effectively fix the interest
         rate on a portion of the Company's  floating  rate debt.  Under current
         accounting  standards,  no gain or loss is recognized on changes in the
         fair value of these swaps. Under the Statement, gains or losses will be
         recognized  based on  changes  in the fair  value  of the  swaps  which
         generally occur as a result of changes in interest  rates.  The Company
         is  currently  evaluating  the  financial  impact of  adoption  of this
         statement.  The adoption is not  expected to have a material  effect on
         the Company's consolidated results of operations, financial position or
         cash flows.


18.      Commitments and Contingencies

         The Company is subject to various  legal  proceedings  and claims which
         have arisen in the ordinary  course of its  business.  The Company does
         not believe  that the ultimate  resolution  of such matters will have a
         material  effect on the Company's  consolidated  financial  position or
         results of operations.

         The  Company has a  commitment  to purchase  certain  inventory  from a
         supplier  through  December  1999.  This  commitment is not expected to
         surpass usage requirements through this period.

         The Company, along with many other potentially  responsible parties, is
         a defendant in declaratory actions to determine the allocation of costs
         for the  investigation and remediation of a Superfund cleanup site. The
         Company  believes its insurance  will cover any costs  incurred in this
         matter.  The  Company is also,  in general,  subject to  possible  loss
         contingencies  pursuant  to  federal  or state  environmental  laws and
         regulations.  Although  these  contingencies  could  result  in  future
         expenses or  judgments,  such expenses or judgments are not expected to
         have a material effect on the Company's consolidated financial position
         or results of operations.


19.      Quarterly Financial Information (unaudited)

         Summarized  unaudited  quarterly  financial  data for the  years  ended
         December 31, 1998 and 1997 are:

<TABLE>
<CAPTION>
         (Thousands of dollars
          except per share data)               First     Second      Third     Fourth      Total
          --------------------------------------------------------------------------------------
         Year Ended December 31, 1998 (1)
<S>                                         <C>        <C>        <C>        <C>        <C>     
         Net sales ......................   $101,528   $104,846   $109,486   $137,187   $453,047
         Gross profit ...................     18,452     19,578     19,608     25,565     83,203
         Net income .....................      1,112      1,270      1,002        716      4,100
         Net income per share
           Basic ........................   $    .17   $    .19   $    .15   $    .11   $    .63
           Diluted ......................        .17        .19        .15        .11        .62

         Year Ended December 31, 1997 (2)
         Net sales ......................   $103,388   $103,170   $102,462   $105,847   $414,867
         Gross profit ...................     18,303     18,407     18,279     16,762     71,751
         Net income .....................      1,105      1,176      1,233      1,977      5,491
         Net income per share
           Basic ........................   $    .17   $    .18   $    .19   $    .30   $    .84
           Diluted ......................        .17        .18        .19        .29        .83
<FN>

         (1)  The  operations  of the Bell  acquisition  are  included  from the
              September 14, 1998  acquisition  date.  Income for the quarter and
              year ended  December  31, 1998  includes a  restructure  and other
              expense of $1,050,000 ($634,000 after tax) for the reorganizing of
              the  operations  into three  divisions and the  integration of the
              Bell  locations.  The total of the basic net incomes per share for
              the quarters does not equal the basic net income per share for the
              year due to rounding.

         (2)  Income for the quarter and year ended December 31, 1997,  includes
              $2,300,000   ($1,381,000   after  tax)  write-down  of  electronic
              equipment inventory to market,  $3,658,000  ($2,183,000 after tax)
              gain on the sale of a capital lease and $401,000  ($241,000  after
              tax) loss on a business divestiture.
</FN>
</TABLE>


<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Shareholders and the Board of Directors
  of PrimeSource Corporation

In our  opinion,  the  consolidated  financial  statements  listed  in the index
appearing  under item 14(a)(1) on page 29 of this Form 10-K present  fairly,  in
all material  respects,  the financial  position of PrimeSource  Corporation and
subsidiaries  (the  "Company") 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.  These financial  statements are the responsibility of the Company's
management;  our  responsibility  is to express  an  opinion on these  financial
statements  based on our audits.  We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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,  assessing the accounting  principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion  expressed
above.

PricewaterhouseCoopers  LLP

Philadelphia, PA  19103
February 23, 1999



<PAGE>




                                    PART III.


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

None.


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Incorporated  by reference from the definitive  proxy statement to be filed with
the Securities  and Exchange  Commission by April 30, 1999,  except  information
regarding executive officers which appears under Part I.


ITEM 11.  EXECUTIVE COMPENSATION

Incorporated by reference from the Registrants' definitive proxy statement to be
filed with the Securities and Exchange Commission by April 30, 1999.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Incorporated by reference from the Registrants' definitive proxy statement to be
filed with the Securities and Exchange Commission by April 30, 1999.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated by reference from the Registrants' definitive proxy statement to be
filed with the Securities and Exchange Commission by April 30, 1999.




<PAGE>


                                    PART IV.


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

(a)(1)   Financial Statements

         The following  financial  statements have been included as part of this
         report:

<TABLE>
<CAPTION>
                                                                       Form 10-K
                                                                            Page
                                                                       ---------
<S>                                                                           <C>
         Consolidated Statements of Income                                    13
         Consolidated Balance Sheets                                          14
         Consolidated Statements of Cash Flows                                15
         Consolidated Statements of Shareholders' Equity                      16
         Notes to Consolidated Financial Statements                           17
         Report of Independent Accountants                                    27
</TABLE>

(a)(2)   Financial Statement Schedule
         (a) The following financial statement schedule is submitted herewith:
              -Schedule II Valuation of Qualifying Accounts and Reserves
              
               All other schedules for which provision is made in the applicable
               accounting  regulations of the Securities and Exchange Commission
               are  not  required   under  the  related   instructions   or  are
               inapplicable, and therefore have been omitted.
              
          
               Report of Independent Accountants on Financial Statement Schedule

(a)(3)   Exhibits
         The  required  exhibits  are included at the back of this Form 10-K and
         are  described in the Exhibit  Index  immediately  preceding  the first
         exhibit.

(b)      Reports on Form 8-K
         On September 28, 1998,  the  Registrant  filed a Form 8-K to report the
         acquisition of Bell Industries'  graphic imaging group. On November 26,
         1998,  the  Registrant  filed a Form 8-K/A to amend the above filing to
         include the  financial  information  required  under item 7 of Form 8-K
         which was not available at the time of the original filing.
         .





<PAGE>


                    PRIMESOURCE CORPORATION AND SUBSIDIARIES



<TABLE>
          SCHEDULE II -- VALUATION OF QUALIFYING ACCOUNTS AND RESERVES


<CAPTION>
Column A                                       Column B             Column C              Column D       Column E
---------------------------------           -----------   ---------------------------   ------------   ------------
Classification                               Balance at                 Charged to                          Balance
                                              Beginning   Charged to         Other        Deductions         at End
(thousands of dollars)                        of Period     Expenses      Accounts        Write-offs      of Period
-------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1998
<S>                                             <C>          <C>           <C>            <C>              <C>     
       Allowance for doubtful accounts ......   $ 1,913      $   440       $ 1,295 (A)    $  (229)(E)      $  3,419
       Amortization of goodwill .............     1,435          523                                          1,958
       Inventory reserves ...................     4,664          233         2,000 (A)     (1,483)(F)         5,414
------------------------------------------------------------------------------------------------------------------- 
                                                $ 8,012      $ 1,196       $ 3,295        $(1,712)         $ 10,791
 ------------------------------------------------------------------------------------------------------------------

For the year ended December 31, 1997
       Allowance for doubtful accounts ......   $ 1,787      $   694                       $ (568)(E)      $  1,913
       Amortization of goodwill .............     1,102          333                                          1,435
       Inventory reserves ...................     3,172        2,602       $  (137)(B)       (973)(F)         4,664
 ------------------------------------------------------------------------------------------------------------------
                                                $ 6,061      $ 3,629       $  (137)       $(1,541)          $ 8,012
 ------------------------------------------------------------------------------------------------------------------

For the year ended December 31, 1996
       Allowance for doubtful accounts ......   $ 1,372      $   865                      $  (450)(E)      $  1,787
       Amortization of goodwill .............       825          316       $   (39)(C)                        1,102
       Inventory reserves ...................     1,752          364         1,754 (D)       (698)(F)         3,172
 ------------------------------------------------------------------------------------------------------------------
                                                $ 3,949      $ 1,545       $ 1,715        $(1,148)          $ 6,061
 ------------------------------------------------------------------------------------------------------------------

<FN>
(A) Related to the acquisition of Bell Industries' Graphic Imaging Group.

(B)  Reserve  disposed  of with the sale of the  pressroom  material  converting
operation.

(C) Reserve  disposed of with the sale of the assets of Onandaga  Litho  Supply,
Inc.

(D)  Related to the acquisition of VGC  Corporation's  branch  operations in St.
     Louis, Missouri; Minneapolis,  Minnesota; Milwaukee, Wisconsin; Des Moines,
     Iowa; and Omaha, Nebraska.

(E) Doubtful accounts written off, net of any recoveries.

(F) The disposal of obsolete inventory, net of any recoveries.
</FN>
</TABLE>



<PAGE>


                      REPORT OF INDEPENDENT ACCOUNTANTS ON
                          FINANCIAL STATEMENT SCHEDULE

To the Shareholders and the Board of Directors
  of PrimeSource Corporation

Our audits of the consolidated  financial statements of PrimeSource  Corporation
and subsidiaries  referred to in our report dated February 23, 1999 appearing in
Item  14(a)(1)  on page 29 of this  Form  10-K  also  included  an  audit of the
financial  statement  schedule  listed in Item  14(a)(2) on page 29 of this Form
10-K. In our opinion,  the financial  statement schedule presents fairly, in all
material  respects,  the  information set forth therein when read in conjunction
with the related consolidated financial statements.

PricewaterhouseCoopers  LLP

Philadelphia, Pennsylvania
February 23, 1999


<PAGE>


                    PRIMESOURCE CORPORATION AND SUBSIDIARIES

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.




Dated March 26, 1999
                              /s/ James F. Mullan                         
                                  James F. Mullan
                                   President and
                                   Chief Executive Officer
                                   (principal executive officer)



Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the  following  person on the behalf of the  registrant
and in the capacity and on the date indicated.



Dated March 26, 1999
                              /s/ William A. DeMarco                      
                                  William A. DeMarco
                                  Vice President, Chief Financial Officer
                                  (principal financial and accounting officer)




<PAGE>


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.

<TABLE>
<CAPTION>
Signature                               Capacity                           Date    
-----------------------------------------------------------------------------------                  


<S>                                     <C>                           <C> 
/s/ Richard E. Engebrecht               Chairman of the Board and      March 2, 1999
--------------------------------------  Director of PrimeSource
     Richard E. Engebrecht              Corporation
                                        

/s/ Fred C. Aldridge, Jr.               Director of PrimeSource        March 2, 1999
--------------------------------------  Corporation
     Fred C. Aldridge, Jr.              

/s/ Philip J. Baur, Jr.                 Director of PrimeSource        March 2, 1999
--------------------------------------  Corporation
     Philip J. Baur, Jr.                

/s/ John H. Goddard, Jr.                Executive Vice President and   March 2, 1999
--------------------------------------  Director of PrimeSource
     John H. Goddard, Jr.               Corporation
                                        

/s/ Gary MacLeod                        Director of PrimeSource        March 2, 1999
--------------------------------------  Corporation
     Gary MacLeod                       

/s/ James F. Mullan                     President, Chief Executive     March 2, 1999
--------------------------------------  Officer and Director of
     James F. Mullan                    PrimeSource Corporation
                                        

/s/ Klaus D. Oebel                      Director of PrimeSource        March 2, 1999
--------------------------------------  Corporation
     Klaus D. Oebel                     

/s/ Edward N. Patrone                   Director of PrimeSource        March 2, 1999
--------------------------------------  Corporation
     Edward N. Patrone                  


/s/ John M. Pettine                     Director of PrimeSource        March 2, 1999
--------------------------------------  Corporation
     John M. Pettine                    
</TABLE>






<PAGE>


                                  Exhibit Index


Exhibit Number and Description

The  following  Exhibit  Numbers  refer to  Regulation  S-K, Item 601. All other
exhibits are omitted because they are inapplicable.

  2.1      Agreement and Plan of Reorganization  dated as of May 27, 1994 by and
           between  MOMENTUM  CORPORATION  and  PHILLIPS & JACOBS,  INCORPORATED
           (filed   as  Annex  A  to  the   Proxy/Prospectus   included   within
           registration  statement  No.  33-54913  on  Form  S-4  filed  by  the
           Registrant on August 4, 1994)

  2.2      Form of Plan of  Merger  (filed  as  Annex B to the  Proxy/Prospectus
           included within registration statement No. 33-54913 on Form S-4 filed
           by the Registrant on August 4, 1994)

  2.3      Asset  Purchase  Agreement  By And Among VGC Corp.,  VGC Holding USA,
           Inc., NV Koninklijke KNP BT and  PrimeSource  dated November 1, 1996,
           for  the  purchase  of  the  operating  assets  (excluding   accounts
           receivable) of VGC  Corporation's  branch  operations in Minneapolis,
           Minnesota;   Milwaukee,  Wisconsin;  Des  Moines,  Iowa;  and  Omaha,
           Nebraska.  (filed as exhibit 2 to Form 8-K dated  November  13, 1996,
           File No. 0-21750)

  2.4      Asset  Purchase  Agreement By And Among Momentum  Corporation  And TK
           Gray,  Inc.  And Its  Shareholders  dated  April  15,  1994,  for the
           purchase  of  substantially  all of the  assets  and  certain  of the
           liabilities of TK Gray, Inc. (filed as exhibit 2(i) to Form 8-K dated
           May 2, 1994, File No. 0-18112)

  2.5      Asset Purchase  Agreement  between  PrimeSource  Corporation and Bell
           Industries,   Inc.   dated  August  28,  1998  for  the  purchase  of
           substantially  all the assets and certain  liabilities of the Graphic
           Imaging Group of Bell  Industries,  Inc.  (filed as exhibit 2 to Form
           8-K dated September 28, 1998, File No. 000-21750)
 
  3.1      Amended and  Restated  Articles of  Incorporation  of the  Registrant
           (filed   as  Annex  C  to  the   Proxy/Prospectus   included   within
           registration  statement  No.  33-54913  on  Form  S-4  filed  by  the
           Registrant on August 4, 1994)

  3.2      Amended and Restated  By-laws of the Registrant  (filed as Annex D to
           the  Proxy/Prospectus  included  within  registration  statement  No.
           33-54913 on Form S-4 filed by the Registrant on August 4, 1994)

  3.3      Amendment to Amended and Restated By-laws of the Registrant effective
           May 7, 1997.  (filed as Exhibit 10.18 to Form 10-K, File No. 0-21750,
           dated March 28, 1997)
  
  4.1      Form of  Common  Stock  Certificate  (filed  with  Form 10  filed  by
           Registrant  on May 12, 1993,  (File No.  0-21750 and as  subsequently
           amended on Form 8 filed on May 28, 1993, Form 8 filed on July 6, 1993
           and Form 8 filed on July 13, 1993)

  4.2      Form of Common Stock Certificate,  effective September 1, 1994 (filed
           as Exhibit 4.2 to Form 10-K, File No. 0-21750, dated March 30, 1995)

 10.1      Form of Phillips & Jacobs,  Inc. 1993 Long Term Incentive Plan (filed
           as Exhibit 10.1 to Form 10-K, File No. 0-21750, dated March 30, 1995)

 10.2      Form of  Phillips & Jacobs,  Incorporated  Indemnification  Agreement
           (filed with Form 10 filed by  Registrant  on May 12, 1993,  (File No.
           0-21750) and as subsequently amended on Form 8 filed on May 28, 1993,
           Form 8 filed on July 6, 1993 and Form 8 filed on July 13, 1993)*


<PAGE>

 10.3      Form of Supplemental  Executive Retirement Plan Agreement (filed with
           Form 10 filed by Registrant on May 12, 1993,  (File No.  0-21750) and
           as subsequently amended on Form 8 filed on May 28, 1993, Form 8 filed
           on July 6, 1993 and Form 8 filed on July 13, 1993)*

 10.4       Employment  Agreement  between the Registrant and W.A. DeMarco dated
           December  31,  1996  (filed as Exhibit  10.5 to Form  10-K,  File No.
           0-21750, dated March 28, 1997)*

 10.5      Employment  Agreement  between the Registrant  and J.F.  Mullan dated
           December  31,  1996  (filed as Exhibit  10.6 to Form  10-K,  File No.
           0-21750, dated March 28, 1997)*

 10.6      Form of Tax Matters Agreement (filed with Form 10 filed by Registrant
           on May 12, 1993,  (File No. 0-21750) and as  subsequently  amended on
           Form 8 filed on May 28, 1993, Form 8 filed on July 6, 1993 and Form 8
           filed on July 13, 1993)

 10.7      Amendment No. 1 to Agreement among Employers Participating in Certain
           Qualified  Plans  (filed  as  Exhibit  10.14  to  theProxy/Prospectus
           included within registration statement No. 33-54913 on Form S-4 filed
           by the Registrant on August 4, 1994)*

 10.8      1993  Replacement  Option Plan (P&J Spin-off) for Directors (filed as
           Annex  I  to  the   Proxy/Prospectus   included  within  registration
           statement No.  33-54913 on Form S-4 filed by the Registrant on August
           4, 1994)*

 10.9      Phillips  &  Jacobs,  Incorporated  401(k)  Savings  Plan  and  Trust
           Agreement  (filed as Exhibit  10.14 to Form 10-K,  File No.  0-21750,
           dated March 28, 1994)*
 
 10.10     Restated  Momentum  Distribution  Inc.  Supplemental  Benefits  Plan,
           effective  April 22, 1991 (filed as Exhibit 10.13 to Form 10-K,  File
           No. 0-18112 dated March 30 1993)*

 10.11     Employment  Agreement between the Registrant and John H. Goddard, Jr.
           dated  December 24, 1996 (filed as Exhibit  10.14 to Form 10-K,  File
           No. 0-21750 dated March 25, 1998)*

 10.12     Form of Indemnification  Agreement for Directors and certain officers
           effective  September 1, 1994 and executed in January,  1996 (filed as
           Exhibit 10.22 to Form 10-K, File No. 0-21750, dated March 26, 1996)*

 10.13     PrimeSource  Corporation Pension Plan (filed as Exhibit 10.23 to Form
           10-K, File No. 0-21750, dated March 26, 1996)*

 10.14     Credit   Agreement  dated  as  of  November  1,  1996  by  and  among
           PrimeSource Corporation,  Dixie Type & Supply Company, Inc., Onondaga
           Litho  Supply  Co.,  Inc.  and The Banks  Party  Hereto and PNC Bank,
           National Association,  As Agent (filed as Exhibit 10.18 to Form 10-K,
           File No. 0-21750, dated March 28, 1997)

 10.15     Employment  Agreement  between the Registrant and Edward Padley dated
           December  31,  1997  (filed as Exhibit  10.19 to Form 10-K,  File No.
           0-21750 dated March 25, 1998)*

 10.16     Employment  Agreement  between the  Registrant  and D. James  Purcell
           dated December 31, 1997(filed as Exhibit 10.20 to Form 10-K, File No.
           0-21750 dated March 25, 1998)*

 21        Subsidiaries of the Registrant

 23        Consent of PricewaterhouseCoopers LLP, Independent Accountants

 27        Financial Data Schedule for the year ended December 31, 1998

 99.1      Undertakings

*Management  contracts and/or compensatory  plans,  contracts or arrangements in
which a director and/or a named executive officer participates.