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, 1997            Commission file Number  0-21750

                             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,  1998 the  aggregate  market  value of the voting  stock held by
nonaffiliates was approximately $66.4 million.

As of March 24,  1998 there were  6,522,711  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 35 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 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  and
systems integrator serving the printing, publishing and graphic arts industries.
For approximately 135 years, the Company or its  unincorporated  predecessor has
been servicing these industries.  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 Stock Market's National Market.

Subsequent  to the  spin-off  from  TBC,  the  Company  has had two  significant
business combinations. 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.  With
these acquisitions,  the Company estimates it currently covers 75% of the United
States market. 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 imaging industries.

The Company is headquartered in Pennsauken, New Jersey and has one business with
two areas of focus, one servicing the digital electronic component of the market
providing system design, installation, servicing, training and technical support
as well as ongoing  workflow and  cost-support  analyses and the other providing
supplies and traditional equipment to the market.

The Company  maintains a  decentralized  management  structure  which allows the
operating  divisions  broad  discretion  in  the  conduct  of  their  respective
businesses,   including   responsibility  for  management  of  their  suppliers,
customers and  employees.  Management is evaluated  against their  financial and
non-financial  goals  which are  established  on an annual  basis.  The  Company
emphasizes  return on net assets and sales growth under its financial  goals. In
order to provide  shareholder  value,  the  Company  believes  it must strive to
maximize its long-term return on the  shareholders'  investment.  By quantifying
this objective and applying it at the operating  level,  the Company believes it
can best meet this goal.  Management believes that this 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 25,000.  No customer
accounted for more than 3% of the Company's net sales in 1997.

Consumable   products,   which  include  film,   plates,   proofing   materials,
photographic  chemicals,  printing blankets and pressroom  chemistry,  presently
represent  approximately  80% of total sales.  The remaining 20% is derived from
sales of printing presses,  electronic  imaging equipment,  desktop  publishing,
electronic color proofing  equipment,  scanning systems,  and other hardware and
software  products.  The  industry  is  moving  from  an  analog  to  a  digital
environment. As a result of this transition, management expects sales of certain
types of sensitized  film and paper products to continue  trending  down,  while
sales of certain  high-technology  products  and  equipment  used in the digital
process to increase.



<PAGE>


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 more sophisticated operations offering more services to their customers.

While  the  Company  sells  primarily  the  same  products  as its  competitors,
generally at similar prices,  the Company  attempts to  differentiate  itself by
focusing on providing training,  technical support,  and a value-added  approach
with products which will make its customers  more  efficient and  effective.  In
addition,  the  Company's  broad  geographic  presence  provides an advantage in
servicing  regional  and  national  customers.  Based on the  changes  which are
occurring in the industry,  management  believes this broad  national  presence,
combined  with the  emphasis on  technical  support,  will  provide  significant
added-value to its 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 that it is one of the largest  dealers 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  25% 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 657 employees at December 31, 1997.



<PAGE>

<TABLE>
<CAPTION>
EXECUTIVE OFFICERS OF THE REGISTRANT

                                                BUSINESS EXPERIENCE                               POSITION HELD
NAME                                  AGE       LAST FIVE YEARS                                   SINCE
---------------------------          -----     ------------------------------------------         -----------------
<S>                                   <C>      <C>                                                 <C>
James F. Mullan                       58       President and Chief Executive                           1991-Present
President and                                      Officer of Registrant
Chief Executive Officer

John H. Goddard, Jr.                  50       Executive Vice President                            September, 1994-
Executive Vice President                           of Registrant                                            Present
                                               President, Chief Executive Officer                         1992-1994
                                                   of Momentum Corporation


William A. DeMarco                    52       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
                                               Vice President of Finance and Operations                   1992-1993
                                                   of Phillips & Jacobs, Incorporated


Barry C. Maulding                     52       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
                                               General Counsel, Director of Administration and            1992-1993
                                                   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:


<TABLE>
<CAPTION>
                                                                     Approximate
                                                                          Square
Location                                                                 Footage
-----------------------------                                        -----------
Corporate Headquarters
<S>                                                                       <C>
       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
       Des Moines, IA (Ankeny)                                            14,000
       Houston, TX                                                         7,000
       Jackson, MS                                                         6,000
       Kalamazoo, MI                                                      20,000
       Kansas City, KS                                                    16,800
       Lititz, PA                                                         14,000
       Los Angeles, CA (Cerritos)                                          9,900
       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                                                          10,000
       Orlando, FL                                                        14,400
       Pennsauken, NJ                                                     32,000
       Pittsburgh, PA                                                     10,500
       Portland, OR                                                        7,800
       San Francisco, CA (South San Francisco)                            10,000
       Seattle, WA (Tukwila)                                              38,600
       St. Louis, MO                                                      22,000

</TABLE>


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 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 two  Superfund  cleanup  sites.  The Company
believes its insurance will cover any costs  incurred in these two matters.  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 Stock Market's  National Market
under the symbol PSRC.

The following  quarterly  stock price and dividend  information  is provided for
1996 and 1997.

<TABLE>
<CAPTION>
                                              Stock Price        Cash Dividends
                                   High               Low             Per Share
-------------------------------------------------------------------------------
1996
<S>                           <C>              <C>                   <C>
   First Quarter              $    6.50        $     5.00            $     .045
   Second Quarter                  7.50              5.00                  .045
   Third Quarter                   7.50              5.75                  .045
   Fourth Quarter                  8.13              6.00                  .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 3,500 shareholders of record as of December 31, 1997.

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, 1998.





<PAGE>
ITEM 6.  SELECTED FINANCIAL DATA
The following selected historical  consolidated  financial data has been derived
from  consolidated  financial  statements.  On August 1, 1993,  the  Company was
spun-off from Tasty Baking Company ("TBC"). Accordingly, the historical data for
1993,  which  include the  operations of the Company when it was a subsidiary of
TBC, may not necessarily reflect the results of operations or financial position
that would have been obtained had the Company been an independent  publicly-held
company  during the entire year.  The  operations  of Momentum  Corporation  are
included from September 1, 1994, the date Momentum merged with the Company. 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)          1997(1)      1996         1995(2)      1994         1993(3)
----------------------------------------------------------------------------------------------------------
Statement of Income Data
<S>                                       <C>              <C>         <C>            <C>           <C>
Net sales ................................   $ 414,867    $ 366,657    $ 357,077    $ 238,154    $ 167,744
Cost  of sales ...........................     343,116      301,428      293,790      194,346      135,094
----------------------------------------------------------------------------------------------------------
Gross profit .............................      71,751       65,229       63,287       43,808       32,650
Operating expenses .......................      63,257       57,033       58,615       37,362       26,572
----------------------------------------------------------------------------------------------------------
Income from operations ...................       8,494        8,196        4,672        6,446        6,078
Interest expense .........................      (2,913)      (1,915)      (2,235)      (1,113)        (531)
Gain on sale of capital lease ............       3,658
Loss on business divestiture .............        (401)
Other income-net .........................         515          421          441          408          251
----------------------------------------------------------------------------------------------------------
Income before provision for income
    taxes and cumulative effect of changes
    in accounting principles .............       9,353        6,702        2,878        5,741        5,798
Provision for income taxes ...............       3,862        2,788        1,232        2,210        2,399
----------------------------------------------------------------------------------------------------------
Income before cumulative effect of
    changes in accounting principles .....       5,491        3,914        1,646        3,531        3,399
Cumulative effect on prior years of
    changes in accounting principles .....                                                          (1,306)
----------------------------------------------------------------------------------------------------------
Net income ...............................   $   5,491    $   3,914    $   1,646    $   3,531    $   2,093
==========================================================================================================

Per Share Data
Income before cumulative effect of
changes in accounting principles
    Basic ................................   $     .84    $     .60    $     .25    $     .72    $     .83
    Diluted ..............................         .83          .60          .25          .71          .83
==========================================================================================================
Net income
    Basic ................................   $     .84    $     .60    $     .25    $     .72    $     .51
    Diluted ..............................         .83          .60          .25          .71          .51
==========================================================================================================

Balance Sheet Data
Working capital ..........................   $  69,151    $  67,040    $  65,168    $  60,987    $  28,631
Total assets .............................     138,491      134,175      119,804      120,760       52,427
Total long-term obligations ..............      32,788       36,250       32,202       29,094       12,747
Shareholders' equity .....................      52,548       48,183       45,572       46,169       20,654
==========================================================================================================

<FN>
(1)    Income  for  1997,  includes  a charge  to cost of sales  for  $2,300,000
       ($1,381,000  after tax) for the  write-down  of  demonstration  and other
       digital electronic 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.

(2)    Income for 1995, includes a one-time  restructuring 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.

(3)    Income for 1993,  includes a one-time  charge to  operating  expenses  of
       $609,000  ($519,000  after tax) resulting from costs  associated with the
       spin-off from TBC  consisting  primarily of legal,  accounting  and other
       professional  fees  and  an  after  tax  charge  of  $1,306,000  for  the
       cumulative  effect of changes in methods of  accounting  for income taxes
       and  postretirement  benefits other than pensions.  Per share information
       for 1993 is based on the  average  number of shares of TBC common  shares
       outstanding  for the year  converted to Company shares using the spin-off
       ratio of two Company shares for every three shares of TBC common stock.
</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,
                                              -----------------------------
                                                  1997      1996      1995
---------------------------------------------------------------------------

<S>                                              <C>       <C>       <C>
Net sales ..................................     100.0%    100.0%    100.0%
Cost of sales ..............................      82.7      82.2      82.3
--------------------------------------------------------------------------
Gross profit ...............................      17.3      17.8      17.7

Selling, general and administrative expenses      14.5      14.7      15.0
Depreciation and amortization ..............        .6        .7        .7
Provision for doubtful accounts ............        .2        .2        .3
Restructure expense ........................                            .4
--------------------------------------------------------------------------
Income from operations .....................       2.0       2.2       1.3

Interest expense ...........................       (.7)      (.5)      (.6)
Gain on sale of capital lease ..............        .9
Loss on business divestiture ...............       (.1)
Other income-net ...........................        .1        .1        .1
--------------------------------------------------------------------------
Income before provision for income taxes ...       2.2       1.8        .8
Provision for income taxes .................        .9        .7        .3
--------------------------------------------------------------------------
Net income .................................       1.3%      1.1%       .5%
==========================================================================
</TABLE>


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 charge for demonstration and other
digital  electronic  inventory,  a $3.7  million  gain on the sale of a  capital
lease, and a $.4 million loss on a business divestiture.  Excluding these items,
which will be discussed later in further  detail,  the net income for 1997 would
have been $4,930,000 ($.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,   although  there  were  fluctuations   between  geographic
locations.

In 1997,  the  Company  established  a  systems  group to  service  the  digital
electronic  component of the market.  Although this group will work closely with
the local  distribution  centers,  the  group is  structured  based on  distinct
products  with a separate  staff with  technical  expertise to provide  workflow
analysis,  and  installation,  training and service,  to more  effectively  meet
customer requirements.  Included in this reorganization is the centralization of
the electronics inventory in two primary locations,  eliminating the duplication
of  demonstration  and  other  electronics  inventory  at each of the  Company's
branches. In conjunction with this centralization and new distribution approach,
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 the existing business,  plus the continued efforts
to reduce  costs  within  the  Company.  These  gains were  partially  offset by
additional  staffing required for the new Systems Division.  The Company expects
increased sales and gross margins in 1998 to justify these additional expenses.

In 1997, the provision for doubtful accounts decreased to $694,000 from $865,000
in 1996.  The  Company  has  continued  to benefit  from more  stringent  credit
requirements which were initially implemented in 1995.

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 acquisition of VGC.

In 1997,  the Company sold its  interest in a capital  lease in the Los Angeles,
California area for a gain of approximately  $3.7 million.  The lease rents were
significantly lower than the existing market, which resulted in the market value
for  the  lease.  From  a  Company  operating   standpoint,   the  facility  was
substantially  larger  than  what was  required  for the  Company's  operations.
Subsequent  to the sale,  the  Company  moved its Los  Angeles  operations  to a
facility of appropriate size for the areas operations.

In  addition,  in 1997,  the  Company  sold its  pressroom  material  converting
operation,  which consisted primarily of inventory and machinery,  to a national
converting company and simultaneously entered into a supplier agreement with the
buyer. The transaction  allows the Company to focus its efforts on marketing and
selling the products and in developing an alliance with the largest converter in
the industry. The Company recorded a loss on the divestiture of $401,000.

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. 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 1996 TO 1995

Net income for 1996 was $3,914,000, or $.60 per share compared to $1,646,000, or
$.25 per share for 1995.  The  results  for 1995  include a  one-time  charge of
$1,315,000  ($794,000  after  related tax benefit) for  restructuring  expenses.
Excluding  this  restructure  expense,  net  income  for 1995  would  have  been
$2,440,000 ($.37 per share).

Net  sales in 1996  were  $366,657,000  compared  to  $357,077,000  in 1995,  an
increase  of 3%.  This  sales  increase  is  primarily  the  result  of the  VGC
acquisition. Excluding the impact of the VGC acquisition, sales were flat during
the  year,  with  modest  decreases  in the  first  half of the year and  modest
increases in the second half. Gross profit as a percent of sales remained stable
between the two years, at 17.8% in 1996 and 17.7% in 1995.

Selling,  general,  and administrative  expenses as a percent of sales decreased
from  15.0% in 1995 to 14.7% in 1996.  As  previously  indicated,  in 1995,  the
Company incurred a restructuring charge of $1,315,000. This expense was incurred
in the  consolidation  of five  distribution  centers,  the  realignment  of two
others,  and the  centralization of certain financial and information  services.
The efficiencies in aligning  operations by geographical  area and consolidating
duplicate facilities and functions,  combined with other cost reduction programs
resulted in a containment of expenses in 1996.

Interest expense  decreased from $2,235,000 in 1995 to $1,915,000 in 1996. Prior
to the  acquisition  of VGC in November,  interest  expense was lower during the
year due to decreased  working capital levels.  With the acquisition of VGC, the
debt levels increased with a corresponding increase in interest expense.

The effective income tax rate decreased from 42.8% in 1995 to 41.6% in 1996. The
lower rate in 1996 is primarily due to  non-deductible  expenses  being a lesser
percent of income in 1996 compared to 1995.


Financial Condition and Liquidity

Cash used in operating  activities  was  $1,795,000  in 1997.  Cash  provided by
operations was $7,701,000  and  $3,024,000 in 1996 and 1995,  respectively.  The
substantial  decrease in cash flow in 1997  compared to 1996 is primarily due to
increased  working capital levels in 1997. This increase reflects the adjustment
of working  capital levels for the VGC acquisition to ongoing  operating  levels
and temporary  increases in inventory  levels to ensure  inventory  availability
through the conversion of the Company to a single business system. The effect of
changes in asset levels decreased cash flow by $6.7 million in 1997, compared to
an increase in cash flows in 1996 of $.5 million. In addition, although the 1997
cash flow from  operations  excludes  the pretax gain on the sale of the capital
lease, the related tax expense of approximately $1.5 million is reflected in the
outflow of cash.

Cash flow provided by investing  activities was $3,650,000 in 1997,  compared to
cash flows used by investing  activities of  $14,471,000  and $1,062,000 in 1996
and 1995,  respectively.  The cash generated in 1997 was primarily from the sale
of the  capital  lease and the  pressroom  material  converting  operation.  The
primary  expenditure in 1996, was for the VGC  acquisition.  In the three years,
property and  equipment  expenditures  ranged  between $1.5 and $2 million.  The
Company had no material  capital  expenditure  commitments at December 31, 1997.
Capital expenditures for 1998 are anticipated to be approximately $2 million. In
addition,  the Company's  business  strategy is to continue to acquire  regional
distributors  within the Company's  current  markets or companies that offer new
products and services to the printing and imaging industries.

Cash flows from financing  activities were  $1,855,000 used in 1997,  $6,770,000
provided  in  1996,  and  $2,580,000  used in 1995.  The  cash  used in 1997 was
primarily for the paydown of debt of $2,448,000 and was primarily  provided from
the proceeds from the sale of the capital lease and the business divestiture. In
1996, the cash provided was from an increase in debt and an increase in the book
overdraft,  and was used along with cash generated  from  operations for the VGC
acquisition.  The other primary  component of financing  activities was dividend
payments of $1.2 million in 1997 and 1996 and $2.5 million in 1995.

The Company's  primary source of debt financing is a revolving  credit agreement
with a  commitment  of $50  million of which  $18.5  million  was  available  at
December 31, 1997. The Company believes this source of borrowing,  combined with
cash from operations,  is sufficient to support the current capital requirements
of the  Company.  For  potential  acquisitions  which  would  exceed the current
financing  levels,  the Company  believes  based on the current  capacity of the
balance sheet for additional debt, with a current debt to equity ratio of .65 to
1, and the Company's prior success in integrating new  acquisitions,  additional
debt capital would be available to the Company at favorable rates.


PROCEDURES FOR THE YEAR 2000 ISSUE

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 Company has contracted  with the software  manufacture to
work with the Company's  management  information  system  department to make the
necessary  programming  changes to correct this problem.  This work is scheduled
for the  summer  of  1998.  The  Company  does  not  anticipate  the cost of the
modifications will have a material impact on the Company's results of operations
or financial position. In addition,  the Company is in the process of initiating
formal  communications with its significant suppliers and customers to determine
the  extent to which the  Company  might be  impacted  by those  third  parties'
failure to correct any year 2000 issues.


DERIVATIVE FINANCIAL INSTRUMENTS

In 1997, the Company began utilizing 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.




<PAGE>


NEW ACCOUNTING STANDARDS

In June 1997,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
and SFAS No.  131,  "Disclosures  about  Segments of an  Enterprise  and Related
Information."  SFAS 130  establishes  standards  for  reporting  and  display of
comprehensive  income and its components in the financial  statements.  SFAS No.
131  establishes  standards  for  the way  public  business  enterprises  report
information about operating segments in annual financial statements and requires
that those enterprises  report selected  information about operating segments in
interim financial reports issued to shareholders. In addition, SFAS No. 131 also
establishes  standards  for related  disclosures  about  products and  services,
geographic areas and major customers.  These statements are effective for fiscal
years  beginning  after  December  15,  1997.   Reclassification   of  financial
statements for earlier periods  provided for  comparative  purposes is required.
The Company is in the process of evaluating these disclosure  requirements.  The
adoption of these statements is not expected to have any impact on the Company's
consolidated results of operations, financial position or cash flows.






<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)     1997         1996         1995
-----------------------------------------------------------------------------------
<S>                                             <C>          <C>          <C>
Net sales ...................................   $ 414,867    $ 366,657    $ 357,077
Cost of sales ...............................     343,116      301,428      293,790
-----------------------------------------------------------------------------------
Gross profit ................................      71,751       65,229       63,287

Selling, general, and administrative expenses      60,151       53,748       53,547
Depreciation and amortization ...............       2,412        2,420        2,663
Provision for doubtful accounts .............         694          865        1,090
Restructure expense .........................                                 1,315
-----------------------------------------------------------------------------------
Income from operations ......................       8,494        8,196        4,672

Interest expense ............................      (2,913)      (1,915)      (2,235)
Gain on sale of capital lease ...............       3,658
Loss on business divestiture ................        (401)
Other income-net ............................         515          421          441
-----------------------------------------------------------------------------------
Income before provision for income taxes ....       9,353        6,702        2,878

Provision for income taxes ..................       3,862        2,788        1,232
-----------------------------------------------------------------------------------
Net income ..................................   $   5,491    $   3,914    $   1,646
===================================================================================

Net income per share
Basic .......................................   $     .84    $     .60    $     .25
Diluted .....................................         .83          .60          .25
===================================================================================
<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)                           1997         1996
--------------------------------------------------------------------------------------------
Assets
Current Assets
<S>                                                                    <C>         <C>
Trade receivables, less allowances of $1,913 and $1,787, respectively  $  53,861   $  54,044
Other receivables ...................................................      6,675       6,612
Inventories .........................................................     53,919      48,741
Deferred income taxes ...............................................      2,361       1,982
Other ...............................................................      1,155         671
--------------------------------------------------------------------------------------------
Total  Current Assets ...............................................    117,971     112,050

Property and equipment, net .........................................     12,315      13,719
Excess of cost over net assets of businesses acquired,
  net of accumulated amortization of $1,435 and $1,102, respectively       4,217       4,487
Deferred income taxes ...............................................      1,705       1,763
Long-term receivables ...............................................        824         895
Other assets ........................................................      1,459       1,261
--------------------------------------------------------------------------------------------
Total Assets ........................................................  $ 138,491   $ 134,175
============================================================================================

Liabilities and Shareholders' Equity
Current Liabilities
Current portion of long-term obligations ............................  $   1,362   $   1,550
Accounts payable ....................................................     34,045      29,781
Book overdraft ......................................................      5,609       3,847
Accrued payroll and benefits ........................................      3,434       2,587
Other accrued liabilities ...........................................      4,370       7,245
--------------------------------------------------------------------------------------------
Total Current Liabilities ...........................................     48,820      45,010

Long-term obligations, net of current portion .......................     32,788      36,250
Accrued pension and other liabilities ...............................      2,387       2,577
Postretirement benefits other than pension ..........................      1,948       2,155
--------------------------------------------------------------------------------------------
Total Liabilities ...................................................     85,943      85,992

Commitments and Contingencies

Shareholders' Equity
Common stock, $.01 par value, 24,000,000 shares authorized
6,516,620 and 6,514,795 issued and outstanding, respectively ........         65          65
Additional paid-in capital ..........................................     25,586      25,533
Retained earnings ...................................................     26,897      22,628
Unamortized restricted stock awards .................................                    (43)
--------------------------------------------------------------------------------------------
Total  Shareholders' Equity .........................................     52,548      48,183
--------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity ..........................  $ 138,491   $ 134,175
============================================================================================

<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)                                          1997         1996         1995
----------------------------------------------------------------------------------------------
Operating Activities
<S>                                                        <C>          <C>          <C>
Net income .............................................   $   5,491    $   3,914    $   1,646
Adjustments to reconcile net income to net
cash provided by (used in)operating activities:
   Depreciation ........................................       1,980        1,900        2,006
   Amortization ........................................         432          520          657
   Provision for doubtful accounts .....................         694          865        1,090
   Gain on sale of capital lease .......................      (3,658)
   Loss on business divestiture ........................         401
   Other ...............................................        (391)          28          756
Changes in assets and liabilities, net of
effects from business combinations/divestitures:
   Receivables .........................................        (574)      (4,751)      (6,658)
   Inventories .........................................      (7,754)       1,485        2,499
   Other current assets ................................        (484)         258         (173)
   Income taxes ........................................         100        1,768        2,064
   Accounts payable and other accrued liabilities ......       2,255        2,917          288
   Pension and other postretirement benefits ...........        (287)      (1,203)      (1,151)
----------------------------------------------------------------------------------------------
Net cash  provided by (used in) operating activities ...      (1,795)       7,701        3,024

Investing Activities
Proceeds from sales of property and equipment ..........         565          218          473
Proceeds from sale of capital lease ....................       3,151
Purchase of property and equipment .....................      (1,918)      (1,530)      (1,713)
Proceeds from business divestitures ....................       2,388        2,235
Payments for business combinations, net of cash acquired                  (14,394)        (954)
(Increase) decrease in long-term receivables ...........          71          (33)         777
(Increase) decrease in other assets ....................        (254)        (732)         479
Other, net .............................................        (353)        (235)        (124)
----------------------------------------------------------------------------------------------
Net cash  provided by (used in) investing activities ...       3,650      (14,471)      (1,062)

Financing Activities
Net decrease in short-term borrowings ..................                                (3,000)
Proceeds from long-term obligations ....................      74,600      142,924      102,925
Repayment of long-term obligations .....................     (77,048)    (138,532)    (100,050)
Increase in book overdraft .............................       1,762        3,847
Dividends paid .........................................      (1,172)      (1,211)      (2,497)
Purchase of common stock ...............................        (106)        (258)
Proceeds from exercise of stock options ................         109                        42
----------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities ....      (1,855)       6,770       (2,580)
----------------------------------------------------------------------------------------------
Net decrease in cash ...................................         ---          ---         (618)
Cash at beginning of year ..............................         ---          ---          618
----------------------------------------------------------------------------------------------
Cash at end of year ....................................   $     ---      $   ---      $   ---
==============================================================================================
Net cash paid (received) during the year for:
     Interest ..........................................   $   2,742    $   1,826    $   2,223
     Income taxes ......................................       3,878        2,314         (644)
==============================================================================================

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

<PAGE>


<TABLE>
                                                  PRIMESOURCE CORPORATION
                                       Consolidated Statements of Shareholders' Equity


<CAPTION>
                                                                                            Unamortized
                                                 Common Stock    Additional                  Restricted
(Thousands of dollars,                       ($.01 Par Value)       Paid-in      Retained         Stock
 except share information)               Shares        Amount       Capital      Earnings        Awards         Total
---------------------------------------------------------------------------------------------------------------------
<S>              <C>                  <C>                <C>       <C>           <C>             <C>         <C>
Balance, January 1, 1995 .........    6,508,630          $ 65      $ 25,359      $ 20,887        $ (142)     $ 46,169
Net income .......................                                                  1,646                       1,646
Cash dividends paid to
   shareholders ($.3825 per share)                                                 (2,497)                     (2,497)
Shares issued under
   noncompete agreement ..........       15,000                         142                                       142
Restricted stock awards and
   related amortization ..........          470                                                      70            70
Stock options exercised and
   related tax benefit ...........        3,195                          42                                        42
---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 .......    6,527,295            65        25,543        20,036           (72)       45,572
Net income .......................                                                  3,914                       3,914
Cash dividends paid to
   shareholders ($.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 ...........       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
=====================================================================================================================
<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 and
         systems integrator  serving the printing,  publishing and graphics arts
         industries.  The Company was spun-off from Tasty Baking Company ("TBC")
         on August 1, 1993. 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.



<PAGE>


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

         Derivative Financial Instruments
         In 1997, the Company began utilizing 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.

         Fair Value of Financial Instruments
         The carrying value of the Company's  short-term  financial  instruments
         such as receivables and payables  approximates 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, 1997 and 1996.
         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.

         Incentive Stock Awards
         The Company  applies the  intrinsic  value based method  prescribed  in
         Accounting  Principles  Board  Opinion  No. 25 to account  for  options
         granted to employees and directors to purchase common shares. Statement
         of Financial  Accounting Standards 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 earnings per share as if the fair-value-based  method of accounting
         had been applied.  No  compensation  expense is recognized on the grant
         date since,  at that date,  the option price equals the market price of
         the underlying common shares.

         Income Taxes
         Income tax  expense is based on pre-tax  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.

         Income Per Common Share
         In  March  1997,  the  Financial   Accounting  Standards  Board  issued
         Statement of Financial  Accounting  Standards  No. 128,  "Earnings  Per
         Share(EPS)"  (SFAS No. 128). The Company adopted SFAS 128 in the fourth
         quarter of 1997. All prior-period EPS data presented has been restated.
         Adoption did not have a material effect on the Company's EPS.

         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  have  been  made to the  1996  consolidated
         financial  statements  and  related  footnotes  to  conform to the 1997
         presentations.



<PAGE>


2.       Business Combinations

         In 1996,  the  Company  acquired  the  operating  assets of KPM 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  $14,394,000.  In 1995, the Company
         acquired  substantially all of the operating assets of Turner Products,
         Inc.  and  Litho  Supply  and  Service  Company's  supply  distribution
         business for an aggregate purchase price of $1,010,000.

         These business  combinations  have been accounted for as purchases and,
         accordingly,   are  included  in  operations   from  their   respective
         acquisition  dates.  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 15 years.  The
         pro-forma  results  of  these   acquisitions   would  not  have  had  a
         significant impact on the Company's consolidated results of operations.


3.       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.


4.       Business Divestitures

         Pressroom Material Converting Operation
         In October 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.

         Onandaga Litho Supply
         In October 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 the sale.


5.       Inventory Write-down to Market

         In 1997, the Company  established a systems group to better utilize the
         Company's  technical  resources  in  providing  solutions  and on-going
         support,  including  installation service and training,  in the digital
         electronics component of the market. Included in this reorganization is
         the  centralization  of  the  electronics  inventory,  eliminating  the
         duplication  of  inventory  at  the  Company's  various  branches.   In
         conjunction with this reorganization and new distribution approach, the
         Company expensed $2.3 million in 1997 to write-down the existing branch
         inventory to current market value based on its expected disposal value.
         This  amount  has been  recorded  in cost of sales in the  Consolidated
         Income Statements.




<PAGE>


6.       Inventories

         Inventories,  which are  primarily  finished  goods,  at  December  31
         consisted of:
<TABLE>
<CAPTION>

         (Thousands of dollars)                            1997             1996
         -----------------------------------------------------------------------
<S>                                                     <C>              <C>
         Last-in, first-out (LIFO) .................... $30,168          $25,838
         First-in, first-out (FIFO) ...................  23,751           22,903
         -----------------------------------------------------------------------
         Total inventories ............................ $53,919          $48,741
         =======================================================================
</TABLE>

         The current  replacement  costs of  inventories  exceeds LIFO values by
         approximately  $5,432,000 and $5,591,000 at December 31, 1997 and 1996,
         respectively.


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

<TABLE>
<CAPTION>
         (Thousands of dollars)                               1997       1996
         --------------------------------------------------------------------
<S>                                                       <C>        <C>
         Land .........................................   $  1,354   $  1,549
         Buildings and improvements ...................      7,605      9,017
         Leased property ..............................        399      1,418
         Machinery, equipment and other ...............     12,460     10,883
         --------------------------------------------------------------------
                                                            21,818     22,867
         Less accumulated depreciation and amortization     (9,503)    (9,148)
         --------------------------------------------------------------------
         Property and equipment, net ..................   $ 12,315   $ 13,719
         ====================================================================
</TABLE>


8.       Long-term Obligations

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

<TABLE>
<CAPTION>
         (Thousands of dollars)                                               1997        1996
         -------------------------------------------------------------------------------------
<S>                                                                       <C>         <C>
         Revolving credit agreement ...................................   $ 31,500    $ 32,450
         Term loan (interest rate of 6.03%), principal payments of
           $167 plus interest due quarterly through December, 1999 ....      1,333       2,000
         Term loan (interest rate of 6.03%), principal payments of
           $134 plus interest due quarterly through December, 1999 ....      1,070       1,604
         Capitalized lease obligation (imputed interest rate of 8.38%)                   1,352
          Capitalized lease obligation (imputed interest rate of 8.97%,
           payable in monthly installments of $12 through  July, 1999)         223         348

         Other miscellaneous notes ....................................         24          46
         -------------------------------------------------------------------------------------
                                                                            34,150      37,800
         Less current portion .........................................     (1,362)     (1,550)
         -------------------------------------------------------------------------------------
         Net long-term obligations ....................................   $ 32,788    $ 36,250
         =====================================================================================
</TABLE>

         Maturities of long-term obligations are $1,362,000 in 1998, $1,288,000
         in 1999, $31,500,000 in 2000 and none thereafter.

         The  Company has an  uncollateralized  $50  million  revolving  credit
         agreement  which  expires  in  January,  2000.  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
         .75% to 1.05% depending on certain specified performance levels.

         The loan agreements provide,  among other terms,  various  requirements
         for tangible net worth and leverage and fixed charge  coverage  ratios.
         The Company was in compliance  with these  requirements at December 31,
         1997.

         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 7.06% at December 31, 1997.  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,  1997,  is a  liability  of  $145,000.  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, 1997 and 1996,  these totaled  $200,000 and
         $300,000, respectively.


9.       Provision for Income Taxes

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

<TABLE>
<CAPTION>
         (Thousands of dollars)          1997      1996        1995
         ----------------------------------------------------------
         Current:
<S>                                   <C>        <C>        <C>
         Federal ..................   $ 3,349    $ 2,571    $ 1,015
         State ....................       791        586        143
         ----------------------------------------------------------
                                        4,140      3,157      1,158
         Deferred:
         Federal ..................      (229)      (264)        58
         State ....................       (49)      (105)        16
         ----------------------------------------------------------
                                         (278)      (369)        74
         ----------------------------------------------------------
         Provision for income taxes   $ 3,862    $ 2,788    $ 1,232
         ==========================================================
</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)                                      1997      1996      1995
         ------------------------------------------------------------------------------------
<S>                                                               <C>       <C>       <C>
         Statutory tax provision ..............................   $ 3,180   $ 2,279   $   979
         State income taxes, net of federal income tax  benefit       490       334        95
         Expenses for which there are no tax benefits .........       172       154       178
         Other, net ...........................................        20        21       (20)
         ------------------------------------------------------------------------------------
         Provision for income taxes ...........................   $ 3,862   $ 2,788   $ 1,232
         ====================================================================================
</TABLE>



<PAGE>


         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)                           1997       1996
         ----------------------------------------------------------------
<S>                                                    <C>        <C>
         Pension and employee benefit costs ........   $   772    $   979
         Inventory reserves ........................       890        165
         Postretirement benefits other than pensions       867        853
         Vacation accrual ..........................       276        408
         Provision for doubtful accounts ...........       677        634
         Depreciation ..............................      (408)      (424)
         Other, net ................................       992      1,130
         ----------------------------------------------------------------
         Total deferred tax assets .................   $ 4,066    $ 3,745
         ================================================================
</TABLE>

10.      Earnings Per Share

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


<TABLE>
<CAPTION>
                                                           1997        1996        1995
         ------------------------------------------------------------------------------
         Average shares of common stock outstanding
<S>                                                   <C>         <C>         <C>
         used to compute basic earnings per share .   6,509,083   6,538,279   6,525,042
         Dilutive effect of stock options .........     126,751      19,710      42,024
         ------------------------------------------------------------------------------
         Average shares of common stock outstanding
         used to compute diluted earnings per share   6,635,834   6,557,989   6,567,066
         Net income per share:
         Basic ....................................       $ .84       $ .60       $ .25
         Diluted ..................................         .83         .60         .25
         ==============================================================================
</TABLE>


11.      Defined Benefit Pension Plans

         Prior to January 1, 1997, the Company had two defined  benefit  pension
         plans,  the  Momentum  Retirement  Plan (the  "Momentum  Plan") and the
         PrimeSource  Pension  Plan  (the  "PrimeSource   Plan").  The  Momentum
         Retirement  Plan covered  substantially  all of the  employees who were
         employed  by  Momentum  Corporation  on  September  1,  1994,  the date
         Momentum  Corporation  merged with the  Company.  Effective  January 1,
         1997, this plan was merged into the  PrimeSource  Plan. The PrimeSource
         Plan, which previously  covered  substantially all of the employees not
         covered by the Momentum Plan, effective with the merger of the Momentum
         Plan, covers substantially all of the employees of the Company.

         Benefits under the plans are generally based on the employees' years of
         service  and  compensation  during  the  years  preceding   retirement.
         Contributions to the plans are based on funding  standards  established
         by the Employee Retirement Income Security Act of 1974.



<PAGE>


         The  components of the net pension  expense for both plans combined for
         the years ended  December 31, 1996 and 1995 and for the merged plan for
         the year ended December 31, 1997 were:

<TABLE>
<CAPTION>
         (Thousands of dollars)                               1997       1996       1995
         -------------------------------------------------------------------------------
<S>                                                        <C>        <C>        <C>
         Service cost of benefits earned during the year   $   728    $ 1,000    $   732
         Interest cost on projected benefit obligation .     1,734      1,718      1,572
         Actual  return on plan assets .................    (5,272)    (3,082)    (5,118)
         Net amortization and deferral .................     2,620        821      3,297
         -------------------------------------------------------------------------------
         Net pension expense(benefit) ..................   $  (190)   $   457    $   483
         ===============================================================================
</TABLE>

         The plans'  funded  status and the amounts  recognized in the Company's
         Consolidated Balance Sheets at December 31 were:
<TABLE>
<CAPTION>
                                                                         PrimeSource    Momentum
                                                                                Plan        Plan
                                                               ---------------------   ---------
         (Thousands of dollars)                                     1997        1996        1996
         ---------------------------------------------------------------------------------------
         Actuarial present value of plan benefit obligations:
<S>                                                             <C>         <C>         <C>
         Vested .............................................   $ 22,811    $  5,931    $ 15,424
         Non-vested .........................................        663          74         361
         ---------------------------------------------------------------------------------------
         Accumulated benefit obligation .....................     23,474       6,005      15,785
         Effect of future salary increases ..................      3,215       1,565         753
         ---------------------------------------------------------------------------------------
         Projected benefit obligation .......................     26,689       7,570      16,538
         Plan assets at fair value ..........................     30,507       6,295      19,591
         ---------------------------------------------------------------------------------------
         Plan assets in excess of (less than)
         projected benefit obligation .......................      3,818      (1,275)      3,053
         Unrecognized prior service cost ....................       (200)       (205)
         Unrecognized gain ..................................     (5,096)       (356)     (2,903)
         ---------------------------------------------------------------------------------------
         Net pension asset (liability) ......................   $ (1,478)   $ (1,836)   $    150
         =======================================================================================
</TABLE>

         The  actuarial   present  value  of  benefits  and  projected   benefit
         obligations  were  determined  using a discount  rate of 7%,  7.75% and
         7.25%  for  the  years  ending   December  31,  1997,  1996  and  1995,
         respectively.  The expected  long-term rate of return on assets was 10%
         and the rate of  compensation  increase  used to measure the  projected
         benefit obligation was 4%.

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


12.      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 $296,000,
         $220,000 and $222,000 for the years 1997, 1996, and 1995, respectively.




<PAGE>


13.      Postretirement Benefits Other Than Pensions

         The Company has two retiree health benefit plans, the Phillips & Jacobs
         Retiree  Health Plan (the "P/J Retiree  Plan") which  primarily  covers
         retirees and employees who previously  participated  in the TBC Retiree
         Medical  Plan,  and the Momentum  Retiree  Medical Plan (the  "Momentum
         Retiree Plan),  which 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)                             1997     1996     1995
         -------------------------------------------------------------------------
<S>                                                        <C>      <C>      <C>
         Service cost of benefits earned during the year   $  16    $  17    $  19
         Interest cost on projected benefit obligation .      89       86      106
         Amortization of net gain ......................    (103)    (107)    (100)
         -------------------------------------------------------------------------
         Net expense (benefit) .........................   $   2    $  (4)   $  25
         =========================================================================
</TABLE>


         The plans'  funded  status and the amounts  recognized in the Company's
         Consolidated Balance Sheets at December 31 were:

<TABLE>
<CAPTION>
         (Thousands of dollars)                             1997       1996
         ------------------------------------------------------------------
         Actuarial present value of benefit obligations:
<S>                                                      <C>        <C>
         Fully eligible plan participants ............   $  (169)   $  (146)
         Other active plan participants ..............       (89)       (76)
         Retirees and vested terminated employees ....      (902)      (830)
         ------------------------------------------------------------------
         Accumulated postretirement benefit obligation    (1,160)    (1,052)
         Unrecognized net gain .......................      (788)    (1,103)
         ------------------------------------------------------------------
         Postretirement benefit liability ............   $(1,948)   $(2,155)
         ==================================================================
</TABLE>


         The accumulated  postretirement benefit obligation was determined using
         a discount rate of 7.00%, 7.75% and 7.25% for the years ending December
         31, 1997, 1996 and 1995, respectively. The health care cost trend rates
         used were 7.67%  (7.18% for health  maintenance  organizations(HMO's)),
         8.12%  (7.45%  for  HMO's),  and 8.56%  (7.73% for HMO's) for the years
         1997, 1996, and 1995,  respectively,  gradually declining to 5% in 2003
         (2005 for HMO's) and  remaining  at that level  thereafter.  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.




<PAGE>


14.      Incentive Stock Awards
         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 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  or its
         subsidiaries terminates.

         Changes in options  outstanding  for the three years ended December 31,
         1997 are:
<TABLE>
<CAPTION>
                                                                   Option Prices
                                                       -------------------------
                                                         Weighted
                                             Options      Average          Range
         -----------------------------------------------------------------------
<S>                                         <C>           <C>       <C>
         Outstanding at January 1, 1995 .    380,297      $ 10.35   $ 5.92-13.03
         -----------------------------------------------------------------------
         Granted ........................     65,350         6.11           6.11
         Exercised ......................     (3,195)        6.34           6.34
         Canceled .......................    (19,009)       10.07     6.34-12.32
         -----------------------------------------------------------------------
         Outstanding at December 31, 1995    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
         =======================================================================
</TABLE>

         At December 31, 1997,  there were 248,513  options  exercisable  with a
         weighted-average option price of $6.40 and a range from $6.11 to $8.06,
         and 93,000 options available for grant. The weighted-average  remaining
         contractual  life of outstanding  options at December 31, 1997 and 1996
         was 7.7 and 8.3 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 earnings 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)      1997         1996        1995
         ----------------------------------------------------------
         Net Income:
<S>                                 <C>         <C>         <C>
         As reported .............  $ 5,491     $ 3,914     $ 1,646
         Pro forma ...............    5,360       3,813       1,631
         ==========================================================
         Earnings Per Share:
         As reported
           Basic .................  $   .84      $  .60      $  .25
           Diluted ...............      .83         .60         .25
         Pro forma
           Basic .................      .82         .58         .25
           Diluted ...............      .81         .58         .25
         ==========================================================
</TABLE>
         The  weighted-average  fair  value per share for  options  granted  was
         $5.23, $2.51 and $1.92 for 1997, 1996 and 1995, respectively.  The fair
         value was estimated using the Black-Scholes  option-pricing  model. For
         options granted in 1997, a dividend yield rate of 1.6%,  expected stock
         volatility  of 45%,  expected  option life of seven years 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%,  expected  option life of seven years and risk-free
         interest rate of 6.75% were used in estimating  the value.  For options
         granted  in  1995,  a  dividend  yield  rate of  2.9%,  expected  stock
         volatility  of 34%,  expected  option life of seven years and risk-free
         interest rate of 5.5% were 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
         which is  amortized  to  operations  over the  restriction  period.  At
         December 31, 1997,  all awards were fully  amortized  and an additional
         61,880 shares were available for future awards.



<PAGE>

15.      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, 1997 are
          as follows:

<TABLE>
<CAPTION>
         Years Ending December 31,
         (Thousands of dollars)
          ----------------------------------------------
<S>       <C>                                     <C>
          1998 .........................          $1,959
          1999 .........................           1,445
          2000 .........................             725
          2001 .........................             229
          2002 .........................             233
          Thereafter ...................              33
         -----------------------------------------------
         Total minimum lease payments             $4,694
         ===============================================
</TABLE>

         Rent expense, net of noncancelable  sublease income of none, $5,000 and
         $98,000  in  1997,  1996,  and  1995,  respectively,   was  $2,219,000,
         $2,182,000 and $2,382,000 for 1997, 1996, and 1995, respectively.

         The Company  leases a distribution  facility from two  employees.  Rent
         expense incurred in connection with this lease was $65,000, $63,000 and
         $60,000 in 1997, 1996, and 1995, respectively.


16.      Restructure Expense

         The Company  recognized a  restructuring  expense of $1,315,000 in 1995
         relating  to  the  consolidation  of  five  distribution  centers,  the
         realignment of two others,  and the centralization of certain financial
         and  information  services.  The  expense  consisted  of  $875,000  for
         employee severance  compensation and $440,000 for costs associated with
         the closure of facilities.  Except for continuing lease commitments for
         closed facilities, which fully terminated in 1997, substantially all of
         the costs were paid in 1995.


17.      New Accounting Standards

         In June 1997,  the FASB issued SFAS No. 130,  "Reporting  Comprehensive
         Income"  (SFAS No.  130).  This  Statement  establishes  standards  for
         reporting and display of comprehensive income and its components in the
         financial  statements.  SFAS No.  130 is  effective  for  fiscal  years
         beginning  after  December  15,  1997.  Reclassification  of  financial
         statements for earlier  periods  provided for  comparative  purposes is
         required.  The Company is in the process of  determining  its preferred
         format. The adoption of SFAS No. 130 is not expected to have any impact
         on the Company's consolidated results of operations, financial position
         or cash flows.

         In June 1997,  the FASB also issued SFAS No.  131,  "Disclosures  about
         Segments of an  Enterprise  and  Related  Information."  This  Standard
         establishes  standards  for the way that  public  business  enterprises
         report   information  about  operating  segments  in  annual  financial
         statements  and  requires  that  those   enterprises   report  selected
         information  about  operating  segments  in interim  financial  reports
         issued to  shareholders.  It also  establishes  standards  for  related
         disclosures  about  products and services,  geographic  areas and major
         customers.  SFAS No. 131 is  effective  for  financial  statements  for
         fiscal years  beginning  after December 15, 1997.  Financial  statement
         disclosures for prior periods are required to be restated.  The Company
         is in the  process  of  evaluating  the  disclosure  requirements.  The
         adoption  of SFAS No.  131 is not  expected  to have any  impact on the
         Company's  consolidated  results of operations,  financial  position or
         cash flows.



<PAGE>

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 two Superfund cleanup sites.
         The Company  believes its  insurance  will cover any costs  incurred in
         these two matters. 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, 1997 and 1996 are:

<TABLE>
<CAPTION>
         (Thousands of dollars
          except per share data)               First     Second      Third      Fourth       Total
         -----------------------------------------------------------------------------------------
         Year Ended December 31, 1997 (1)
<S>                                         <C>        <C>        <C>        <C>         <C>
         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

         Year Ended December 31, 1996 (2)
         Net sales ......................   $ 86,959   $ 87,898   $ 89,344   $ 102,456   $ 366,657
         Gross profit ...................     15,182     15,576     16,062      18,409      65,229
         Net income .....................        829        916        924       1,245       3,914
         Net income per share
           Basic ........................   $    .13   $    .14   $    .14   $     .19    $    .60
           Diluted ......................   $    .13   $    .14   $    .14   $     .19    $    .60

<FN>

         (1)  Income for the quarter and year ended December 31, 1997,  includes
              $2,300,000   ($1,381,000  after  tax)  write-down  of  electronics
              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.


         (2)  The operations of the VGC acquisition are included from the August
              1996  acquisition  date for the St.  Louis branch and the November
              1996 acquisition date for the Minneapolis,  Milwaukee,  Des Moines
              and Omaha branches.

</FN>
</TABLE>





<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Shareholders and the Board of Directors
  of PrimeSource Corporation

We have audited the  accompanying  consolidated  balance  sheets of  PrimeSource
Corporation  and its  subsidiaries  as of December  31,  1997 and 1996,  and the
related consolidated statements of income,  shareholders' equity, and cash flows
for each of the three years in the period ended  December 31, 1997. We have also
audited the financial  statement  schedule  listed in Item 14(a)(2) of this Form
10-K. These financial  statements and this financial  statement schedule are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these  financial  statements  and this financial  statement  schedule
based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  the  consolidated  financial  position of  PrimeSource
Corporation  and its  subsidiaries  as of December  31,  1997 and 1996,  and the
consolidated  results of their  operations  and their cash flows for each of the
three years in the period ended  December 31, 1997 in conformity  with generally
accepted  accounting  principles.  In addition,  in our opinion,  the  financial
statement  schedule  referred to above, when considered in relation to the basic
financial  statements  taken  as a  whole,  presents  fairly,  in  all  material
respects, the information required to be included therein.



/s/ COOPERS & LYBRAND L.L.P.

COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 20, 1998



<PAGE>




                                    PART III.


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, 1998,  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, 1998.


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, 1998.


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, 1998.




<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 .......................   29
</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.

(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
          The  Registrant  did not file a report on Form 8-K during the  quarter
          ended December 31, 1997.





<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, 1997
<S>                                     <C>            <C>             <C>                           <C>
   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)(A)       (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)(B)                     1,102
   Inventory reserves                       1,752            364       $   1,754 (C)       (698)(F)      3,172
--------------------------------------------------------------------------------------------------------------
                                            3,949          1,545           1,715         (1,148)         6,061
--------------------------------------------------------------------------------------------------------------

For the year ended December 31, 1995
   Allowance for doubtful accounts      $   1,457      $   1,090                      $  (1,175)(E)  $   1,372
   Amortization of goodwill                   519            306                                           825
   Inventory reserves                       1,563            561             624 (D)       (996)(F)      1,752
--------------------------------------------------------------------------------------------------------------
                                            3,539          1,957             624         (2,171)         3,949
--------------------------------------------------------------------------------------------------------------

<FN>
(A)  Reserve  disposed  of with the sale of the  pressroom  material  converting
operation.

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

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

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

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




<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 25, 1998
                                   /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 25, 1998
                                   /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 3, 1998
     Richard E. Engebrecht              Director of PrimeSource
                                        Corporation

/s/ Fred C. Aldridge, Jr.               Director of PrimeSource            March 3, 1998
     Fred C. Aldridge, Jr.              Corporation

/s/ Philip J. Baur, Jr.                 Director of PrimeSource            March 3, 1998
     Philip J. Baur, Jr.                Corporation

/s/ John H. Goddard, Jr.                Executive Vice President and       March 3, 1998
     John H. Goddard, Jr.               Director of PrimeSource
                                        Corporation

/s/ Gary MacLeod                        Director of PrimeSource            March 3, 1998
     Gary MacLeod                       Corporation

/s/ James F. Mullan                     President, Chief Executive         March 3, 1998
     James F. Mullan                    Officer and Director of
                                        PrimeSource Corporation

/s/ Klaus D. Oebel                      Director of PrimeSource            March 3, 1998
     Klaus D. Oebel                     Corporation

/s/ Edward N. Patrone                   Director of PrimeSource            March 3, 1998
     Edward N. Patrone                  Corporation


/s/ John M. Pettine                     Director of PrimeSource            March 3, 1998
     John M. Pettine                    Corporation

</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.  (Exhibits  identified  in
parentheses  are on file with the  Securities  and Exchange  Commission  and are
incorporated herein by reference as exhibits hereto.)

 (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)

 (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)*

(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)*


<PAGE>

(10.4)     Employment Agreement between Phillips & Jacobs, Incorporated and D.M.
           Zewiske dated July 1, 1988 (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)*

(10.5)     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)*

(10.6)     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)*

(10.7)     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)

(10.8)     Amendment No. 1 to Agreement among Employers Participating in Certain
           Qualified  Plans  (filed  as  Exhibit  10.14 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)     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)*

(10.10)    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)*

(10.11)    1989  Long-Term   Incentive  Stock  Plan  (filed  with   Registration
           Statement on Form S-8 on December 8, 1994, File No. 33-87360)*

(10.12)    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)*

(10.13)    Momentum  Retirement  Plan (filed as Exhibit 10.18 to Form 10-K, File
           No. 0-21750, dated March 30, 1995)*

(10.14)    Employment  Agreement between the Registrant and John H. Goddard, Jr.
           dated December 24, 1996.*

(10.15)    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)*

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

(10.17)    Orlando,  FL facility  lease dated March 31, 1986 and August 14, 1995
           Lease  Extension  between  the  Registrant  and Dennis M.  Zewiske as
           co-lessor  (filed as Exhibit  10.25 to Form 10-K,  File No.  0-21750,
           dated March 26, 1996)*


<PAGE>

(10.18)    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)

10.19      Employment  Agreement  between the Registrant and Edward Padley dated
           December 31, 1997.*

10.20      Employment  Agreement  between the  Registrant  and D. James  Purcell
           dated December 31, 1997.*

21.1       Subsidiaries of the Registrant

23.1       Consent of Coopers & Lybrand L.L.P., Independent Accountants

27         Financial Data Schedule for the year ended December 31, 1997

27.1       Restated Financial Data Schedule for the quarter ended March 31, 1997

27.2       Restated Financial Data Schedule for the quarter ended June 30, 1997

27.3       Restated  Financial Data Schedule for the quarter ended September 31,
           1997

27.4       Restated Financial Data Schedule for the year ended December 31, 1996

27.5       Restated Financial Data Schedule for the quarter ended March 31, 1996

27.6       Restated Financial Data Schedule for the quarter ended June 30, 1996

27.7       Restated  Financial Data Schedule for the quarter ended September 30,
           1996

99.1       Undertakings


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