<PAGE>   1



                                    FORM 10-Q

                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549

                  QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

[X]  For the quarterly period ended September 27, 1997
     -------------------------------------------------

Commission file number 1-6687
                       ------

                            JOHNSTON INDUSTRIES, INC.
                            -------------------------
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                  Delaware                                        11-1749980
                  --------                                        ----------
      (State or other jurisdiction of                          (I.R.S. Employer
       incorporation or organization)                        Identification No.)

  105 Thirteenth Street, Columbus, Georgia                          31901
  (Address of principal executive offices)                        (Zip Code)

                                 (706) 641-3140
                                 --------------
              (Registrant's telephone number, including area code)

N/A
(Former name, former address and former fiscal year if changed since last 
report.)

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      [ ]

The number of shares outstanding of the Registrant's Common Stock as of
September 27, 1997 was 10,726,272 shares.



<PAGE>   2


                   JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES


                               INDEX TO FORM 10-Q


                         PART I - FINANCIAL INFORMATION


ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:

                  Condensed Consolidated Balance Sheets

                  Condensed Consolidated Statements of Operations

                  Condensed Consolidated Statements of Cash Flows

                  Notes to Condensed Consolidated Financial Statements

ITEM 2.  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                  RESULTS OF OPERATIONS


                           PART II - OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

SIGNATURE PAGE

INDEX TO EXHIBITS


                                       2

<PAGE>   3


                         PART I - FINANCIAL INFORMATION

ITEM 1.     CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                   JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                      -------------------------------------
          (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                    SEPTEMBER 27,  DECEMBER 28,
                                                                        1997           1996
                                                                    -------------  ------------
                                                                    (UNAUDITED)
<S>                                                                  <C>            <C>      
ASSETS
CURRENT ASSETS:
   Cash and Cash Equivalents                                          $  5,798       $  1,748
   Accounts and Notes Receivable (Less Allowance for
      Doubtful Accounts of $1,958 and $1,379)                           41,780         37,168
   Inventories                                                          54,942         65,520
   Net Assets of Discontinued Operations                                                1,838
   Income Taxes Receivable                                               1,439          1,631
   Assets Held for Sale                                                  7,240          7,930
   Prepaid Expenses and Other                                            2,185          3,233
                                                                      --------       --------
      Total Current Assets                                             113,384        119,068

Property, Plant and Equipment-Net                                      118,716        130,047

Goodwill                                                                11,637         14,046
Intangible Asset-Pension                                                 2,042          2,042
Other Assets                                                             3,572          4,886
                                                                      --------       --------

Total Assets                                                          $249,351       $270,089
                                                                      ========       ========

LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES:
   Accounts Payable                                                   $ 20,108       $ 26,412
   Accrued Expenses                                                     11,890         13,089
   Current Maturities of Long-Term Debt                                 11,992          6,510
   Deferred Income Taxes                                                   482            757
                                                                      --------       --------
      Total Current Liabilities                                         44,472         46,768

Long-Term Debt - Less Current Maturities                               137,104        144,314
Other Liabilities                                                       11,097         11,824
Deferred Income Taxes                                                    5,617          7,991

STOCKHOLDER'S EQUITY:
   Preferred Stock, Par Value $.01 per Share; Authorized
      3,000,000 Shares; Issued 325,000                                       3              3
   Common Stock, Par Value $.10 per share; Authorized,
      20,000,000 Shares; Issued 12,467,691 and 12,449,391                1,246          1,246
   Additional Paid-In Capital                                           23,642         23,568
   Retained Earnings                                                    34,706         45,111
                                                                      --------       --------
      Total                                                             59,597         69,928
   Less Treasury Stock; 1,741,419 and 2,086,517 shares                  (8,058)       (10,258)
   Less Minimum Pension Liability Adjustment, Net of Tax Benefit          (478)          (478)
                                                                      --------       --------

      Total Stockholders' Equity                                        51,061         59,192
                                                                      --------       --------

Total Liabilities and Stockholders' Equity                            $249,351       $270,089
                                                                      ========       ========
</TABLE>

See notes to Condensed Consolidated Financial Statements


                                       3

<PAGE>   4

                   JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES
           CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
          -------------------------------------------------------------
          (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                 FOR THE THREE MONTHS ENDED        FOR THE NINE MONTHS ENDED
                                                              -------------------------------    ------------------------------
                                                              SEPTEMBER 27,     SEPTEMBER 28,    SEPTEMBER 27,    SEPTEMBER 28,
                                                                   1997             1996             1997              1996
                                                                 -------          -------          --------          --------
<S>                                                              <C>              <C>              <C>               <C>     
Net Sales                                                        $78,488          $77,071          $252,990          $242,844
                                                                 -------          -------          --------          --------

Costs and Expenses:
Cost of Sales, excluding Depreciation and Amortization            67,697           62,514           209,856           198,781
Selling, General and Administrative                                7,264            6,013            20,852            19,143
Depreciation and Amortization                                      5,202            5,063            15,878            14,849
Restructuring Charges                                                 83              433             7,201             2,685
Loss on Impairment of Assets                                          --               --               903               200
                                                                 -------          -------          --------          --------
Total Costs and Expenses                                          80,246           74,023           254,690           235,658
                                                                 -------          -------          --------          --------
Income (Loss) from Operations                                     (1,758)           3,048            (1,700)            7,186

Other Expenses (Income):
   Interest Expense                                                3,410            2,986            10,131             8,173
   Interest Income                                                  (213)             (51)             (669)             (190)
   Other-Net                                                         771              407             1,109               115
                                                                 -------          -------          --------          --------
      Total Other Expenses - Net                                   3,968            3,342            10,571             8,098
                                                                 -------          -------          --------          --------

      Realized and Unrealized Investment Gain (Loss)                 379           (1,296)              572            (3,712)
                                                                 -------          -------          --------          --------
Loss from Continuing Operations before Tax Provision,
   Minority Interest in Consolidated
   Subsidiary, and Extraordinary Item                             (5,347)          (1,590)          (11,699)           (4,624)

Income Tax Benefit                                                (2,058)            (473)           (3,325)           (1,774)
Minority Interest in Loss of Consolidated Subsidiary                  --               --                --             1,572
                                                                 -------          -------          --------          --------
Loss from Continuing Operations                                   (3,289)          (1,117)           (8,374)           (1,278)

DISCONTINUED OPERATIONS:
Income (Loss) from Discontinued Operations of
   Jupiter National (less applicable
   income tax of $0 and $(113) for the
   three months and $5 and $3,514 for the
   nine months, respectively) net of minority
   interest in income of $0 and $1,455 for
   the nine months, respectively                                      --             (170)              (11)            6,355
Gain (Loss) on Disposal of Jupiter National,
   including provision of $300
   for operating losses during phase-out
   period (less applicable income taxes of
   $0 and $73 for the three months and $60
   and ($862) for the nine months, respectively)                      --              136               137            (1,633)
                                                                 -------          -------          --------          --------
Income (Loss) from Discontinued Operations                            --              (34)              126             4,722
Extraordinary Item, (less applicable income
   taxes of $323), - Loss on Early Extinguishment of Debt             --               --                --               527
                                                                 -------          -------          --------          --------

Net Income (Loss)                                                 (3,289)          (1,151)           (8,248)            2,917

Dividends on Preferred Stock                                          --               41                81                84
                                                                 -------          -------          --------          --------

Net Income (Loss) Available to Common Stockholders               $(3,289)         $(1,192)         $ (8,329)         $  2,833
                                                                 =======          =======          ========          ========
</TABLE>
                                                                       Continued

                                       4

<PAGE>   5

                  JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES
         CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
        -------------------------------------------------------------
        (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                  FOR THE THREE MONTHS ENDED            FOR THE NINE MONTHS ENDED
                                                --------------------------------     --------------------------------
                                                SEPTEMBER 27,      SEPTEMBER 28,     SEPTEMBER 27,      SEPTEMBER 28,
                                                    1997               1996               1997               1996
                                                -------------      -------------     -------------      -------------
<S>                                             <C>                <C>               <C>                <C>     
Earnings (Loss) Per Common Share:
   Loss from Continuing Operations                $ (0.31)           $ (0.11)           $ (0.80)           $ (0.13)
   Discontinued Operations                             --              (0.01)              0.01               0.44
   Extraordinary Loss                                  --                 --                 --              (0.05)
                                                  -------            -------            -------            -------
      Net Earnings (Loss) Per Common Share        $ (0.31)           $ (0.12)           $ (0.79)           $  0.26
                                                  =======            =======            =======            =======

Dividends Per Share                               $    --            $  0.10            $  0.20            $  0.30
                                                  =======            =======            =======            =======
Weighted Average Number of Common and
   Common Equivalent Shares Outstanding            10,726             10,363             10,503             10,704
                                                  =======            =======            =======            =======
</TABLE>

                                                                  
See notes to Condensed Consolidated Financial Statements              Concluded


                                       5

<PAGE>   6

               JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES
      CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
      -----------------------------------------------------------
                       (IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                              FOR THE NINE MONTHS ENDED
                                                                           ------------------------------
                                                                           SEPTEMBER 27,    SEPTEMBER 28,
                                                                                1997            1996
                                                                           -------------    -------------
<S>                                                                        <C>              <C>      
OPERATING ACTIVITIES:
CONTINUING OPERATIONS:
   Loss from Continuing Operations                                            $(8,374)        $ (1,278)
   Adjustments to Reconcile Loss from Continuing Operations
      to Net Cash Provided by (Used in) Operating Activities:
      Depreciation and Amortization                                            15,878           14,849
      Restructuring Charges                                                     7,201
      Loss on Impairment of Assets                                                903              200
      Provision for Bad Debts                                                     512              235
      Net Realized and Unrealized (Gains) Losses on Investments                  (572)           3,712
      Loss on Disposal of Fixed Assets                                              9               91
      Minority Interest in (Loss) of Consolidated Subsidiary                                    (1,572)
      Changes in Assets and Liabilities, Net of Effect of Acquisition
         Accounts and Notes Receivables                                        (5,164)          (1,861)
         Inventories                                                            9,639            3,370
         Deferred Income Taxes                                                 (2,649)          (1,812)
         Prepaid Expenses and Other Assets                                      1,874           (1,341)
         Accounts Payable                                                      (4,603)           2,267
         Accrued Expenses                                                       1,557            2,051
         Income Taxes Receivable                                                  223            1,461
         Other Liabilities                                                       (727)             949
         Other-Net                                                               (200)
                                                                              -------         -------- 

         Total Adjustments                                                     23,881           22,599
                                                                              -------         -------- 

         Net Cash Provided by Continuing Operations                            15,507           21,321

DISCONTINUED OPERATIONS:
   Income (Loss) from Discontinued Operations                                     (11)           6,355
   Gain (Loss) on Disposal of Discontinued Operations                             137           (1,633)
   Cash Provided by (Used in) Discontinued Operations                           1,901           (2,129)
   Items not Affecting Cash - Net                                                  --          (11,809)
                                                                              -------         -------- 

         Net Cash Provided by (Used in) Discontinued Operations                 2,027           (9,216)
                                                                              -------         -------- 

         Net Cash Provided by Operating Activities                             17,534           12,105

INVESTING ACTIVITIES:
CONTINUING OPERATIONS:
   Additions to Property, Plant and Equipment                                  (8,065)         (14,893)
   Decrease in Non-Operating Accounts Payable                                  (1,698)          (6,873)
   Purchase of Minority Interest in Jupiter                                                    (37,693)
   Purchase of T.J. Beall, Net of Cash Acquired                                                    333
                                                                              -------         -------- 

      Net Cash Used in Continuing Operations                                   (9,763)         (59,126)
</TABLE>

                                                                       Continued

                                       6

<PAGE>   7


                   JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES
           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
           -----------------------------------------------------------
                            (IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                     FOR THE NINE MONTHS ENDED
                                                                  ------------------------------
                                                                  SEPTEMBER 27,    SEPTEMBER 28,
                                                                      1997             1996
                                                                  -------------    -------------
<S>                                                               <C>              <C>
INVESTING ACTIVITIES CONTINUED:
DISCONTINUED OPERATIONS:
   Net Loss from Continuing Operations                                   --             (240)
   Proceeds from Sale of Investments                                     --           35,000
                                                                    -------           ------
      Net Cash Provided by Discontinued Operations                       --           34,760
                                                                    -------           ------
      Net Cash Used in Investing Activities                          (9,763)         (24,366)

FINANCING ACTIVITIES:
CONTINUING OPERATIONS:
   Principal Payments of Debt                                        (7,100)        (109,812)
   Proceeds from Issuance of Long-Term Debt                           5,500          159,532
   Borrowings under Line-of-Credit Agreements                                          4,750
   Repayments under Line-of-Credit Agreements                                        (18,000)
   Purchase of Treasury Stock                                                         (2,241)
   Proceeds from Issuance of Common Stock                                36              164
   Dividends Paid                                                    (2,157)          (3,189)
   Extraordinary Item, Loss on Early Extinguishment of Debt                             (850)
                                                                    -------           ------
      Net Cash Provided by (Used in) Continuing Operations           (3,721)          30,354

DISCONTINUED OPERATIONS:
   Principal Payments of Debt                                                        (16,171)
   Proceeds from Issuance of Long-Term Debt                                              117
                                                                    -------           ------
      Net Cash Used in Discontinued Operations                           --          (16,054)
                                                                    -------           ------
      Net Cash Provided by (Used in) Financing Activities            (3,721)          14,300

NET INCREASE (DECREASE) IN CASH AND CASH
   EQUIVALENTS                                                        4,050            2,039

CASH AND CASH EQUIVALENTS
         Net Cash Provided by Operating Activities                    1,748            1,471
                                                                    -------           ------

   End of Period                                                    $ 5,798            3,510
                                                                    =======           ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
   Cash Paid During the Nine Months for:
      Interest                                                      $ 8,182           10,171
                                                                    =======           ======
      Income Taxes                                                  $  (771)           4,120
                                                                    =======           ======
</TABLE>

SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING INFORMATION

The Company acquired T.J. Beall Company in an exchange for preferred stock in
1996.


See notes to Condensed Consolidated Financial Statements               Concluded


                                        7


<PAGE>   8


                   JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



1.       BASIS OF PRESENTATION

         The accompanying condensed consolidated financial statements for the
         three months and nine months ended September 27, 1997 and September 28,
         1996 are unaudited. The September 28, 1996 statements included the
         accounts of Johnston Industries, Inc. ("Johnston"), its direct wholly
         owned subsidiary, Johnston Industries Alabama, Inc. and its indirect
         wholly owned subsidiaries, Johnston Industries Composite
         Reinforcements, Inc. ("JICR" formerly Tech Textiles, USA), T.J. Beall
         Company ("TJB") and Greater Washington Investments, Inc. ("GWI").

         Prior to April 3, 1996, the consolidated financial statements included
         the accounts of Johnston, its wholly owned subsidiaries, Southern
         Phenix Textiles, Inc. ("Southern Phenix"), Opp and Micolas Mills, Inc.
         ("Opp and Micolas"), and JICR, its majority owned subsidiary, Jupiter
         National, Inc. ("Jupiter") and Jupiter's wholly owned subsidiaries,
         Wellington Sears Company ("Wellington"), Pay Telephone America, Ltd.,
         and GWI.

         On April 3, 1996, after the acquisition by Johnston of the minority
         interest in Jupiter (see note 2), Jupiter was merged into Opp and
         Micolas. At the close of business on June 29, 1996, (i) the name of Opp
         and Micolas was changed to Johnston Industries Alabama, Inc. ("JI
         Alabama") (ii) Southern Phenix and Wellington were merged into JI
         Alabama and (iii) JICR, T. J. Beall Company ("TJB") and GWI became
         subsidiaries of JI Alabama.

         The September 27, 1997 statements include the accounts of Johnston, its
         direct wholly owned subsidiary, JI Alabama and its indirect wholly
         owned subsidiaries, JICR, TJB, and GWI (collectively, the "Company").

         In the opinion of management, the unaudited condensed consolidated
         financial statements reflect all adjustments and disclosures which are
         necessary for a fair presentation. All such adjustments, other than
         those relating to restructuring and loss on impairment, are of a normal
         recurring nature. Operating results for the nine months ended September
         27, 1997 are not necessarily indicative of the results that may be
         expected for the entire year. The condensed consolidated financial
         statements included herein should be read in conjunction with the
         financial statements and notes thereto included in the Company's Annual
         Report on Form 10-K for the year ended December 28, 1996. Reference is
         made to the accounting policies of the Company described in the notes
         to consolidated financial statements included in the Company's Annual
         Report on Form 10-K for year ended December 28, 1996.

2.       DISCONTINUANCE OF THE VENTURE CAPITAL SEGMENT

         Concurrent with the Jupiter Acquisition, the Company's management made
         the decision to discontinue the venture capital investment segment of
         Jupiter's operation. Through June 28, 1997, the segment was accounted
         for as discontinued operations, and in accordance with Generally
         Accepted Accounting Principles, the net assets of the discontinued
         segment were recorded as an asset on the consolidated balance sheet and
         were expected to be disposed of by June 1997. During that period, the
         results of operations for Jupiter's venture capital investment
         activities have been recorded as discontinued operations.

         At June 28, 1997, the remaining undisposed portfolio investments have
         been reclassified from net assets of discontinued operations to assets
         held for sale on the consolidated balance sheet, and the results of
         continuing operations for these remaining portfolio investments have
         been reported as income from 


                                       8

<PAGE>   9

         continuing operations on the consolidated statements of income. Prior
         periods presented have been restated accordingly.

         Income before taxes from discontinued operations, inclusive of minority
         interest, includes net realized and unrealized gains from investments
         of approximately $0 and $(283,000) for the three months and ($6,000)
         and $11,324,000 for the nine months ended September 27, 1997 and
         September 28, 1996 respectively. The gains from investments during the
         nine months ended September 28, 1996 are mainly due to gains realized
         on the sale of the Company's investments in EMC Corporation, Viasoft,
         Fuisz and Zoll Medical.

         For the nine months ended September 28, 1996, the loss after income
         taxes for the disposal of the discontinued operations included a
         $4,380,000 write down for the carrying value after considering
         liquidation plans on disposal of the remaining portfolio investments
         and related debt as well as a $300,000 provision for future operating
         costs.

         In June 1997, the Company engaged a business consultant to review the
         remaining undisposed portfolio investments and to aggressively pursue
         collection of amounts due, including both notes and accrued interest,
         from various portfolio investment companies. Considering the progress
         which has been made to date, current estimates of amounts which are
         expected to be realized from the portfolio investments exceed previous
         evaluations; however, the recognition of recoverable value is limited
         by the purchased cost of each portfolio item at March 28, 1996, the
         date of the Jupiter Acquisition.  At September 27, 1997, $521,000 in
         reserves which had been recorded against the value of the portfolio
         investments were reversed. It is management's intention for its agent
         to continue with aggressive management of the remaining investment
         instruments in order to maximize the amounts which may be realized from
         the remaining liquidation of the portfolio investments.

3.       SUBSEQUENT SALE OF T.J. BEALL

         Effective September 29, 1997 an agreement was reached culminating in
         the sale of substantially all of the assets and current liabilities of
         TJB back to the Beall family. The subsequent sale of TJB, to be
         recorded in the fourth quarter, resulted in a charge of $546,000 which
         is reflected in other expenses for the third quarter of 1997.

4.       RESTRUCTURING CHARGES AND LOSSES ON IMPAIRMENT

         In connection with the Jupiter Acquisition, the Company decided to
         close the manufacturing facility in Tarboro, North Carolina, which had
         been operated by Jupiter's Wellington subsidiary (the "Tarboro
         Facility") in an effort to realign and consolidate certain operations,
         concentrate capital resources on more profitable operations and better
         position itself to achieve its strategic corporate objectives. All
         activities related to the closing of the Tarboro Facility were
         substantially completed in January 1997. The Tarboro Facility, which is
         currently vacant, is held for sale and is recorded at its estimated net
         realizable value. During the nine months ended September 28, 1996, the
         Company recorded restructuring charges totaling $4,551,000 which
         included $1,619,000 to write-downs of accounts receivable and
         inventory, $625,000 for severance costs, $433,000 for relocating
         production equipment, $964,000 for actual operating losses and $910,000
         for other costs related to the operation. Of these costs, $1,866,000,
         representing the minority interest (the portion of Wellington not owned
         by Johnston prior to the Jupiter Acquisition), has been recorded in the
         purchase accounting for the Jupiter Acquisition with the remaining
         $2,685,000 recorded as an expense on the consolidated statement of
         operations.

         The plan for the closing of the Tarboro Facility called for termination
         of 168 employees with various job descriptions at the facility. As of
         September 27, 1997, 167 employees had been terminated. Through
         September 27, 1997, approximately $4,071,000 has been charged to the
         reserves established for the closing. These costs included $539,000
         related to severance costs.

         In consideration of the Company's inability to find buyers for its real
         properties which are held for sale, the Tarboro Facility and the former
         Jupiter office in Rockville, MD (the "Rockville Office"), the Company
         has also recorded an additional loss on impairment of assets to
         reduce the carrying value of these properties 


                                       9

<PAGE>   10


         to estimated net realizable value. A loss of $650,000 was recorded for
         the Tarboro Facility and a loss of $253,000 was recorded for the
         Rockville Office during June, 1997.

         In August 1997, the Company finalized its plans to cease manufacturing
         operations at its Langdale Facility and close its Outlet Store in West
         Point, Georgia in an effort to further consolidate certain
         manufacturing activities and concentrate on efficient and profitable
         operations. The Langdale Facility, the original building of which was
         constructed in 1866, is the Company's oldest facility and contained
         both weaving operations and yarn manufacturing operations. The yarn
         manufacturing operations have been eliminated and selected equipment
         and associated product offerings of the weaving operations have been
         relocated to other of the Company's facilities. The remaining weaving 
         operations at the Langdale Facility have been closed. The Langdale 
         Facility will be retained as warehouse, distribution and potential 
         future manufacturing space for JI Alabama's Fiber Products Division. 
         A contract for sale of the Outlet Store building has been executed 
         with closing scheduled on or before December 1, 1997. During the 
         Second Quarter of 1997, the Company recorded restructuring charges
         totaling $4,381,000 related to closure of the Langdale Facility and the
         Outlet Store including write-downs on machinery and equipment of
         $2,674,000, write-downs of $939,000 on inventories, a write-down of
         $573,000 on the Langdale building, and a write-down of $195,000 on the
         store building.

         In recognition of the disappointing operating results realized at TJB
         since its acquisition in March of 1996 and risks inherent in future
         operations, the Company recorded restructuring charges of $1,983,000
         during the second quarter of 1997 for the write-off of goodwill related
         to the acquisition of TJB. The Company also recorded a $754,000 write-
         down in the second quarter of 1997 related to the Company's investment
         in manufacturing computer software for which the original 
         implementation attempt has been abandoned.


5.       INVENTORIES

         Inventories consisted of the following at September 27, 1997 and
         December 28, 1996:

<TABLE>
<CAPTION>
                                                            SEPTEMBER 27, 1997       DECEMBER 28, 1996
                                                            ------------------       -----------------

         <S>                                                <C>                      <C>        
         Finished Goods                                        $29,147,000              $30,051,000
         Work-In Process                                         9,654,000                9,012,000
         Raw Materials and Supplies                             16,141,000               26,457,000
                                                               -----------              -----------
         Total                                                 $54,942,000              $65,520,000
                                                               ===========              ===========
</TABLE>


                                       10

<PAGE>   11
        

6.       LONG-TERM FINANCING AND SHORT-TERM BORROWINGS

         Long-term debt and short-term borrowings consisted of the following at
         September 27, 1997 and December 28, 1996:

<TABLE>
<CAPTION>
                                                            SEPTEMBER 27, 1997        DECEMBER 28, 1996
                                                            ------------------        -----------------

             <S>                                            <C>                       <C>         
             Term Loans                                        $ 72,375,000             $ 74,500,000
             Lines of Credit Borrowings                                   0                        0
             Revolving Credit Loans                              74,550,000               73,899,000
             Purchase Money Mortgage Debt                         1,043,000                1,108,000
             Industrial Development Note
                 (net of unamortized discount)                      578,000                  639,000
             Other Loans                                            550,000                  678,000
                                                               ------------             ------------
             Total                                              149,096,000              150,824,000
         Less Current Maturities                                (11,992,000)              (6,510,000)
                                                               ------------             ------------
                                                               $137,104,000             $144,314,000
                                                               ============             ============
</TABLE>

         Bank Credit Agreement

         On March 28, 1996, the Company signed a new credit agreement with a
         syndicate of lenders (the "Bank Credit Agreement") to provide aggregate
         loans of up to $160,000,000 to repay existing indebtedness, to provide
         funds used to acquire the remaining outstanding shares of the common
         stock of Jupiter and to finance working capital needs. The Bank Credit
         Agreement provides for revolving credit loans (the "Revolver") of up to
         $80,000,000, a term loan for $40,000,000 ("Term Loan A") and a term
         loan for an additional $40,000,000 ("Term Loan B"). Borrowings under
         the Revolver and the Term Loan A mature March, 2001, and Term Loan B
         matures March, 2003. The term loans are repayable in quarterly
         installments starting in 1997.

         As of September 27, 1997, the Company had outstanding borrowings under
         the Bank Credit Agreement of $146,925,000 and availability under the
         Revolver of $5,325,000.

         Covenants and Restrictions

         Under the terms of the Bank Credit Agreement, substantially all assets
         are pledged as collateral for the borrowings under the Bank Credit
         Agreement. The Bank Credit Agreement requires the Company to maintain
         certain financial ratios and specified levels of tangible net worth.
         The Bank Credit Agreement places a limit on the Company's level of
         capital expenditures and its ability to effect certain types of mergers
         or acquisitions. The Bank Credit Agreement permits the Company to pay
         dividends on its Common Stock provided it is in compliance with various
         covenants and provisions contained therein, which among other things
         limit dividends and restrict investments to the lesser of (x) 20% of
         total assets of the Company, on a fully consolidated basis, as of the
         date of determination thereof, or (y) $5,000,000 for the period
         commencing on January 1, 1996 and ending on December 31, 1996 or (z)
         $5,000,000 plus 50% of cumulative consolidated net income for the
         period commencing January 1, 1997, minus 100% of cumulative
         consolidated net loss for the consolidated entities for such period, as
         calculated on a cumulative basis as of the end of each fiscal quarter
         of the consolidated entities with reference to the financial statements
         for such quarter.

         The initial Bank Credit Agreement was amended on June 28, 1996 and
         February 28, 1997 to modify certain covenants. Prior to the execution
         of these amendments, the Company was in technical noncompliance with
         certain of the financial covenants contained therein. At June 28, 1997
         and September 27, 1997, the Company was not in compliance with certain
         of its covenants under the Bank Credit Agreement. Such events of
         noncompliance at June 28, 1997 and September 27, 1997 have been waived
         by 


                                       11

<PAGE>   12

         the syndicate of lenders who are parties to the Bank Credit Agreement.
         The Company is exploring alternatives to reduce the likelihood of
         future non-compliance with the covenants of the Bank Credit Agreement,
         including amending the covenants or restructuring the long-term debt.
         Management believes that it will be successful in these efforts,
         although an agreement has not yet been reached.

         The Bank Credit Agreement requires the Company to prepay the principal
         installments on Term Loan A and Term Loan B, in inverse order of the
         scheduled maturities, from the net cash proceeds from the sale or
         liquidation of the Tarboro Facility, Rockville Office and venture
         capital portfolio investments.  Subsequent to September 27, 1997,
         payments totaling $2,357,328 were made against term loans representing
         net cash proceeds from liquidation of venture capital portfolio 
         investments.  Accordingly, this amount was included in current 
         maturities of long-term debt at September 27, 1997.

7.       FINANCIAL INSTRUMENTS

         Interest Rate Swaps

         In order to minimize the Company's exposure to the uncertainty of
         floating interest rates, the Bank Credit Agreement requires the Company
         to maintain interest rate protection agreements covering a minimum of
         50% of the principal amount outstanding under the term loans, as long
         as these loans exceed an aggregate of $40 million. Under the Credit
         Agreement, the Company may elect to pay interest based on either the
         prime rate plus various margins or the LIBOR rate plus various margins.
         Effective June 7, 1996, the Company entered into interest rate swap
         agreements with several lenders whereby it exchanged its floating rate
         obligations under the Bank Credit Agreement on $38 million notional
         principal amount for a fixed rate payment obligation of 6.705% for a
         term of three years, with an option to renew for an additional two
         years. Prior to the interest rate swap agreements, the Company was
         paying interest based on a floating rate of 5.535%, based on a three
         month LIBOR rate.

8.       EARNINGS PER SHARE

         Earnings per share for the nine months ended September 28, 1996 were
         calculated based on the weighted average number of shares of common and
         common equivalent shares outstanding during the periods. For the three
         months ended September 27, 1997 and September 28, 1996 and the nine
         months ended September 27, 1997, common shares from assumed exercise of
         stock options are not presented as they are antidilutive in periods for
         which a loss is presented.  Preferred dividends were deducted from net
         income to compute earnings applicable to common stock. Additionally,
         earnings (loss) per share were computed for continuing operations,
         discontinued operations, and extraordinary item.

         New Accounting Pronouncement

         In February 1997, the Financial Accounting Standards Board issued
         Statement of Financial Accounting Standards No. 128, "Earnings per
         Share" ("SFAS No. 128"). This Statement establishes new standards for
         computing and presenting earnings per share ("EPS") information. SFAS
         No. 128 simplifies the computation of earnings per share currently
         required by APB Opinion No. 15 and its related interpretations. The new
         statement replaces the presentation of "primary" (and when required
         "fully diluted") earnings per share with "basic" and "diluted" earnings
         per share. This new statement is effective for financial statements
         issued for periods ending after December 15, 1997 including interim
         periods; earlier application is not permitted. The Company's
         computation of basic and diluted EPS under SFAS No. 128 for the nine
         months ended September 27, 1997 and September 28, 1996 will not be
         materially different than EPS previously reported.


                                       12


<PAGE>   13


9.       INCOME TAXES

         The benefit for income taxes from continuing operations as computed
         under Statement of Financial Accounting Standards No. 109, "Accounting
         for Income Taxes", is comprised of the following for the nine months
         ended September 27, 1997 and September 28, 1996:

<TABLE>
<CAPTION>
                                             1997             1996
                                             ----             ----

<S>                                      <C>              <C>         
Federal:
    Current                              $(1,501,000)     $  (528,000)
    Deferred                              (1,532,000)      (1,400,000)
                                         -----------      -----------
                                          (3,033,000)      (1,928,000)

State:
    Current                                  (38,000)          77,000
    Deferred                                (254,000)          77,000
                                         -----------      -----------
                                            (292,000)         154,000

Provision (benefit) for income taxes     $(3,325,000)     $(1,774,000)
                                         ===========      ===========
</TABLE>

         The reconciliation of the Company's effective income tax rate to the
         Federal statutory rate from continuing operations of 34% for the nine
         months ended September 27, 1997 and September 28, 1996 follows:

<TABLE>
<CAPTION>
                                                      1997              1996
                                                      ----              ----

<S>                                                <C>              <C>         
Federal income taxes at statutory rate             $(3,978,000)     $(1,572,000)

State income taxes, net of Federal tax benefit        (193,000)         102,000
Equity in Income of Majority-Owned Subsidiary               --         (508,000)
Amortization of Goodwill                               851,000          155,000
Other - Net                                             (5,000)          49,000
                                                   -----------      -----------
                                                   $(3,325,000)     $(1,774,000)
                                                   -----------      -----------
Effective rate                                            28.4%            60.3%
                                                   ===========      ===========
</TABLE>

         The effective tax rates in 1997 and 1996 were distorted by the
         amortization of non-deductible goodwill.

10.      CONTRIBUTION OF TREASURY STOCK TO PENSION PLAN

         On June 24, 1997, the Company contributed 345,098 shares of Treasury
         Stock to the Company's Pension Plan.  This transaction, totaling
         $2,200,000, satisfied a portion of the Company's required funding
         for pension plans.

11.      RELATED PARTY TRANSACTIONS

         Redlaw Industries, Inc. ("Redlaw"), a stockholder, is the commissioned
         sales agent for the Company for sales of the Company's products into
         Canada under the terms of a non-exclusive sales agency agreement. For
         the nine months ended September 27, 1997, there were no sales to
         Redlaw. As of September 27, 1997 accounts receivable from Redlaw was $0
         and commissions payable to Redlaw were $26,638. Johnston also maintains
         inventory at a public warehouse in Ontario, Canada which is supervised
         by Redlaw. At September 27, 1997, there was approximately $330,025 of
         inventory located at the warehouse in Canada.


                                       13

<PAGE>   14




ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS



GENERAL

The accompanying condensed consolidated financial statements for the three
months and nine months ended September 27, 1997 and September 28, 1996 are
unaudited. The September 28, 1996 statements included the accounts of Johnston
Industries, Inc. ("Johnston"), its direct wholly owned subsidiary, Johnston
Industries Alabama, Inc. and its indirect wholly owned subsidiaries, Johnston
Industries Composite Reinforcements, Inc. ("JICR" formerly Tech Tech Textiles,
USA), T.J. Beall Company ("TJB") and Greater Washington Investments, Inc.
("GWI").

Prior to April 3, 1996, the consolidated financial statements included the
accounts of Johnston, its wholly owned subsidiaries, Southern Phenix Textiles,
Inc. ("Southern Phenix"), Opp and Micolas Mills, Inc. ("Opp and Micolas"), and
JICR, its majority owned subsidiary, Jupiter National, Inc. ("Jupiter") and
Jupiter's wholly owned subsidiaries, Wellington Sears Company ("Wellington"),
Pay Telephone America, Ltd., and GWI.

On April 3, 1996, after the acquisition by Johnston of the minority interest in
Jupiter (see note 2), Jupiter was merged into Opp and Micolas. At the close of
business on June 29, 1996, (i) the name of Opp and Micolas was changed to
Johnston Industries Alabama, Inc. ("JI Alabama") (ii) Southern Phenix and
Wellington were merged into JI Alabama and (iii) JICR, TJB and GWI became
subsidiaries of JI Alabama.

The September 27, 1997 statements include the accounts of Johnston, its direct
wholly owned subsidiary, JI Alabama and its indirect wholly owned subsidiaries,
JICR, TJB, and GWI (collectively, the "Company").During the fourth quarter of
1996, operations of Wellington were divided along lines of woven products and
fiber products, thus forming four divisions of JI Alabama which included Opp &
Micolas Division, Southern Phenix Division, Wellington Sears Division (woven),
and Fiber Products Division (fiber). During the third quarter of 1997 and in
conjunction with closure of the Wellington Sears Division's Langdale Facility,
operations of the Wellington Sears Division were divided whereby its woven
facility in Columbus, Georgia was combined with the Opp and Micolas Division to
form the Greige Fabrics Division and its finishing facility in Valley, Alabama
was combined with the Southern Phenix Division to form the Finished Fabrics
Division. The realignment of the four operating divisions into three will
eliminate duplicative selling, general and administrative costs and is intended
to provide divisional management with greater focus on their core markets and
operational objectives and allow enhanced differentiation of each division
within their respective marketplace.

Concurrent with the Jupiter Acquisition, the Company's management made the
decision to discontinue the venture capital investment segment of Jupiter's
operation. This segment was accounted for as discontinued operations through
June 28, 1997 in accordance with APB 30. Accordingly, the net assets of the
discontinued segment were recorded as a current asset on the consolidated
balance sheet and were expected to be disposed of by June 30, 1997. At June 29,
1997, the remaining undisposed portfolio investments were reclassified from net
assets of discontinued operations to assets held for sale on the consolidated
balance sheet, and the results of operations for these remaining portfolio
investments have been reported as part of income from continuing operations on
the consolidated statements of income. Prior periods presented have been
restated accordingly.

RESULTS OF OPERATIONS

Results for the nine months ended September 27, 1997 include substantial
restructuring and impairment charges resulting from the Company's decision to
cease manufacturing operations at its Langdale facility (the "Langdale
Facility") in Valley, Alabama, close its retail store (the "Outlet Store") in
West Point, Georgia, write-off goodwill related to the acquisition of TJB (the
"TJB Acquisition"), and abandon certain manufacturing computer software.
Additionally, the Company divested itself of TJB effective September 28, 1997.
The nine months ended September 28, 1996 included $2,685,000 in restructuring
charges related to the Company's decision to close the manufacturing facility in
Tarboro, North Carolina which had been operated by Wellington (the "Tarboro
Facility") prior to the Jupiter 


                                       14

<PAGE>   15

Acquisition. The Company's policy, which is consistent with generally accepted
accounting principles ("GAAP") and Securities and Exchange Commission ("SEC")
regulations, provides for recognition of certain costs related to restructuring
activities upon adoption of a qualified exit plan. Under the policy, the Company
estimates a) impairment losses for affected assets (typically to write the asset
down to estimated net realizable value), and b) costs for relocating production
equipment. Severance costs related to the exit plan are recorded as
restructuring costs when commitment is made to involuntarily terminate employees
and such employees have been notified of the termination. Other costs incidental
to the restructuring activities, such as professional services, employee
retraining, losses due to operating inefficiencies during the restructuring
activities, etc. are recorded as incurred and are not classified as
restructuring costs. The cessation of production activities at the Langdale
Facility and the associated relocation of production equipment required moving
or repositioning 200 looms among four manufacturing facilities. Such activities
and associated operating disruption, while necessary, have contributed
significantly to depressed margins for the three months and the nine months
ended September 27, 1997. In addition, professional services for the three
months ended September 27, 1997 exceeded the amounts recorded during the
comparable period in 1996 by approximately $944,000. These professional services
are temporary in nature and largely relate to development and execution of the
restructuring plan during 1997.

Net sales for the three months ended September 27, 1997 were $78,488,000
compared to $77,071,000 the third quarter of 1996 reflecting a 1.8% increase of
$1,417,000. Sales of automotive fabrics, which accounted for 2.5% of the
Company's sales in the third quarter of 1997, declined $692,000 (24.9%) while
sales of industrial fabrics decreased approximately $523,000 (2.6%) compared to
the prior period. Sales of home furnishing fabrics remained level despite a
downturn in demand for the Company's flocking substrate fabrics. The market for
these flocking substrates began to strengthen by the end of the third quarter
and although there is no assurance they will regain the position they held prior
to the downturn, they have demonstrated marked improvement. Sales to specialty
markets remained relatively unchanged compared to the third quarter in 1996.
Sales to such specialty markets largely include the Company's Fiber Products
Division (fiber and fabric waste reclamation) and TJB which was acquired at the
end of the first quarter of 1996 and sold just after the end of the third
quarter of 1997. The Company's composite reinforcement business, which is
included in sales to specialty markets, remained unchanged increasing by $13,000
(.6%) from the third quarter of 1996. Markets for apparel fabrics, characterized
generally by low margins, continued to offer some short term opportunities at
higher margins. Sales of apparel fabrics increased by $2,566,000 (266.7%) over
the third quarter of 1996, following on the resurgence of short term
opportunities which first gained notice during the quarter ended June 28, 1997.
Net sales for the nine months ended September 27, 1997 were $252,990,000,
increasing by $10,146,000 (4.2%) over net sales of $242,844,000 for the nine
months ended September 28, 1996. Sales of industrial fabrics were flat while
sales of home furnishing fabrics grew by approximately $4.4 million (3.7%) from
the first nine months of 1996. Sales to specialty markets, including the impact
of the March 1996 acquisition of TJB, increased by almost $6.6 million over the
nine months ended September 28, 1996. Such increase includes an offsetting
decline in sales of composite reinforcement fabrics of $701,000 (10.31%) marking
weaker demand for these specialty fabrics in the current year. Sales of fabric
in miscellaneous markets declined by approximately $2.8 million. Sales of
automotive fabrics, which now represent less than 3% of the Company's sales
declined by $1.5 million (18.3%). Sales of apparel fabrics grew by $3.8 million
due to the continuation of profitable opportunities which began in the second
quarter of 1997.

At September 27, 1997, the sales backlog of the Company was approximately
$67,487,000 compared to sales backlog of approximately $88,581,000 at December
28, 1996 and $75,163,000 at September 27, 1996. The sales backlog at December
28, 1996 includes peak orders for a) outdoor furniture fabrics which are
seasonal, b) wipe cloth fabrics which are cyclical, and c) TJB whose fiber
buying season concludes during the fall and selling season begins in January.
The sales backlog at September 27, 1997 reflects a) lower levels of outdoor
furniture orders as manufacturers have completed their seasonal manufacturing,
b) fulfillment of a wipe cloth contract and c) the absence of TJB which was
excluded from the September 27, 1997 sales backlog due to disposition of this
operation shortly after quarter end. With consideration of the normal seasonal
and cyclical decline in backorders from December to June for certain products,
as described above, management believes that demand for the Company's products
at September 27, 1997 continues to be stable though not strong.

For the three months ended September 27, 1997 compared to the three months ended
September 27, 1996, cost of sales increased by approximately $5.2 million to
$67,697,000. Cost of sales as a percentage of sales increased in the third
quarter of 1997 when compared to the prior period largely reflected disruption
and operational inefficiencies resulting


                                       15

<PAGE>   16

from closure of the Langdale facility and associated restructuring activities as
well as poor yields and weak markets in the TJB operations. Gross margin dropped
from 18.9% for the third quarter of 1996 to 13.7% for the third quarter of 1997.
Cost of sales for the nine months ended September 27, 1997 were $209,856,000
representing an $11.1 million increase over the same period in 1996. Gross
margin declined from 18.1% for the first nine months of 1996 to 17% for the
first nine months of 1997. This change reflects the significant impact of
restructuring activities which occurred in the third quarter of 1997 as
described above.

Selling, general, and administrative expenses of $7,264,000 for the third
quarter of 1997 increased by $1,251,000 from $6,013,000 recorded for the third
quarter of 1996. Comparing the first nine months of 1997 with the same period in
the prior year, selling, general and administrative expenses grew by $1,709,000
to $20,852,000. These increases result from provision for termination benefits
not associated with the exit plan recorded in the second quarter of 1997 as well
as a higher incidence of professional services which have been reflected in both
the second and third quarters of 1997.

In connection with the Jupiter Acquisition, the Company decided to close the
Tarboro Facility in an effort to realign and consolidate certain operations,
concentrate capital resources on more profitable operations and better position
itself to achieve its strategic corporate objectives. All activities related to
the closing of the Tarboro Facility were substantially completed in January
1997. The Tarboro Facility, which is currently vacant, is held for sale and is
recorded at its estimated net realizable value. During the first quarter of
1996, the Company recorded restructuring charges totaling $4,118,000 to cover
anticipated losses from the closing of the Tarboro Facility including $1,619,000
related to write-downs of accounts receivable and inventory, $834,000 for
severance costs and $1,665,000 for other costs related to the operation. Of
these costs, $1,866,000, representing the minority interest (the portion of
Wellington not previously owned by Johnston), has been recorded in the purchase
accounting for the Jupiter Acquisition with the remaining $2,252,000 recorded as
an expense on the consolidated statement of operations.

In August 1997, the Company finalized its plans to cease manufacturing
operations at its Langdale Facility and close its Outlet Store in West Point,
Georgia in an effort to further consolidate certain manufacturing activities and
concentrate on efficient and profitable operations. The Langdale Facility, the
original building of which was constructed in 1866, is the Company's oldest
facility and contained both weaving operations and yarn manufacturing
operations. The yarn manufacturing operations have been eliminated and selected
equipment and associated product offerings of the weaving operations have been
relocated to other of the Company's facilities. The remaining weaving operations
at the Langdale Facility have been closed. The Langdale Facility will be
retained as warehouse, distribution and potential future manufacturing space for
JI Alabama's Fiber Products Division. A contract for sale of the Outlet Store
building has been executed with closing scheduled on or before December 1, 1997.
During the Second Quarter of 1997, the Company recorded restructuring charges
totaling $4,381,000 related to closure of the Langdale Facility and the Outlet
Store including write-downs on machinery and equipment of $2,674,000,
write-downs of $939,000 on inventories, a write-down of $573,000 on the Langdale
building, and a write-down of $195,000 on the store building.

In recognition of the disappointing operating results realized at TJB since its
acquisition in March of 1996 and risks inherent in future operations, the
Company recorded restructuring charges of $1,983,000 during the second quarter
of 1997 for the write-off of goodwill related to the acquisition of TJB. (See
discussion below of the sale of TJB). The Company also recorded a $754,000
write-down in the second quarter of 1997 related to the Company's investment in
manufacturing computer software for which the original implementation attempt
has been abandoned.

Depreciation and amortization expense for the three months ended September 27,
1997 increased $139,000 to $5,202,000 compared to $5,063,000 for the three
months ended September 28, 1996. Depreciation and amortization expense of
$15,878,000 for the nine months ended September 27, 1997 was $1,029,000 higher
than the $14,849,000 recorded for the nine months ended September 28, 1996. This
increase resulted from additional depreciation based on the Company's capital
investment to upgrade older machinery and equipment and also included additional
depreciation related to the Company's step-up in basis of property, plant, and
equipment in connection with the Jupiter acquisition. Such capital investment is
an ongoing process necessary to maintain the Company's production capabilities
and competitive position within the textile industry.

Interest expense for the three months and nine months ended September 27, 1997
was $3,410,000 and $10,131,000 reflecting increases of $424,000 and $1,958,000
compared to the three months and nine months ended September 28,


                                       16

<PAGE>   17

1996 respectively. The increase in the third quarter of 1997 compared to the
third quarter of 1996 reflects higher average rates while the increase in the
first nine months of 1997 compared to the first nine months of 1996 reflects
higher average borrowings resulting from the Company's increased borrowing
related to the Jupiter Acquisition of March 1996, and to a lesser degree, higher
average rates.

Following management's evaluation of TJB, considering future profitability,
operating similarities with other of the Company's operations, and the role TJB
would play in achieving the Company's core operating strategy, an agreement was
reached culminating in the sale of substantially all of the assets and current
liabilities of TJB back to the Beall family effective September 29, 1997. The
sale of TJB resulted in a charge of $546,000 which is reflected in other
expenses for the third quarter of 1997.

The minority interest in loss of consolidated subsidiary reflects the minority
shareholders' proportionate share in the losses of Wellington through March 28,
1996, the date the Jupiter Acquisition was completed.

Concurrent with the Jupiter Acquisition, the Company's management made the
decision to discontinue the venture capital investment segment of Jupiter's
operation. Through June 28, 1997, the segment was accounted for as discontinued
operations, and in accordance with Generally Accepted Accounting Principles, the
net assets of the discontinued segment were recorded as an asset on the
consolidated balance sheet and were expected to be disposed of by June 1997.
During that period, the results of operations for Jupiter's venture capital
investment activities have been recorded as discontinued operations. At June 29,
1997, the remaining undisposed portfolio investments have been reclassified from
net assets of discontinued operations to assets held for sale on the
consolidated balance sheet, and the results of operations for these remaining
portfolio investments have been reported as part of income from continuing
operations on the consolidated statements of income. Prior periods presented
have been restated accordingly. For the nine months ended September 27, 1997,
loss from the discontinued operations was $11,000 net of applicable tax
provision of $5,000 and for the nine months ended September 28, 1996, income
from the discontinued operations was $6,355,000 net of applicable taxes of
$3,514,000 and minority interest in income of $1,455,000. The gains from
investments during the nine months ended September 28, 1996 are mainly due to
gains realized on the sale of the Company's investments in EMC Corporation,
Viasoft, Fuisz and Zoll Medical. In connection with the classification of the
venture capital investment portfolio business as discontinued operations, for
the nine months ended September 28, 1996, the Company recorded a loss on
disposal of Jupiter of $1,633,000 net of the applicable income tax benefit of
$862,000. This loss is mainly reflective of the first quarter 1996 write-down of
the remaining portfolio of venture capital investments from the values
previously established by Jupiter's Board of Directors. Such write-down was
recorded to reduce the investments to their estimated fair value which was
expected to be realized upon the sale of such investments within one year versus
the value of these investments held on a long-term basis.

In June 1997, the Company engaged a business consultant to review the remaining
undisposed portfolio investments and to aggressively pursue collection of
amounts due, including both notes and accrued interest, from various portfolio
investment companies. Considering the progress which has been made to date,
current estimates of amounts which are expected to be realized from the
portfolio investments exceed previous evaluations, however, the recognition of
appreciated value is limited by the purchased cost of each portfolio item at
March 28, 1996, the date of the Jupiter Acquisition. At September 27, 1997,
$521,000 in reserves which had been recorded against the value of the portfolio
investments were reversed. It is management's intention for its agent to
continue with aggressive management of the remaining investment instruments in
order to maximize the amounts which may be realized from the remaining
liquidation of the portfolio investments.

MATERIAL CHANGES IN FINANCIAL CONDITION

As a result of the Jupiter Acquisition, the Company revalued certain Jupiter
assets, mainly inventories and property, plant, and equipment. Due to Johnston's
previous partial ownership interest in Jupiter, the acquisition of the remaining
outstanding interest was accounted for as a "step acquisition" resulting in a
partial step-up in Jupiter assets. The Company recorded such partial step-up in
basis on such assets and has recorded goodwill of $12,477,000 which is to be
amortized over 20 years.


                                       17

<PAGE>   18

LIQUIDITY AND CAPITAL RESOURCES

Working capital at September 27, 1997 was $68,912,000 representing a ratio of
current assets to current liabilities of 2.55 to 1. The Company's primary needs
for capital resources have been funded by borrowings under its Bank Credit
Agreement, which was entered into on March 28, 1996 and thereafter amended on
June 28, 1996 and February 28, 1997 (the "Bank Credit Agreement"). Borrowings
under the Bank Credit Agreement have been used to finance the Jupiter
Acquisition (as discussed above), to refinance certain indebtedness, and to pay
fees and expenses related to the foregoing, and available borrowings will be
used, as needed, to finance working capital and capital expenditure. The Bank
Credit Agreement provides for revolving credit loans (the "Revolver") of up to
$80,000,000, a term loan for $40,000,000 ("Term Loan A") and a term loan for an
additional $40,000,000 ("Term Loan B"). Borrowings under the Revolver and Term
Loan A mature on March 28, 2001 and Term Loan B matures on March 28, 2003. The
term loans are repayable in quarterly installments starting in 1997.

As of September 27, 1997, the Company had outstanding borrowings under the Bank
Credit Agreement of $146,925,000 and availability under the revolver of
$5,325,000.

Under the terms of the Bank Credit Agreement, substantially all assets are
pledged as collateral for the borrowings under the Bank Credit Agreement. The
Bank Credit Agreement requires the Company to maintain certain financial ratios
and specified levels of tangible net worth. The Bank Credit Agreement places a
limit on the Company's level of capital expenditures and its ability to effect
certain types of mergers or acquisitions. The Bank Credit Agreement permits the
Company to pay dividends on its Common Stock provided it is in compliance with
various covenants and provisions contained therein, which among other things
limit dividends and restrict investments to the lesser of (x) 20% of total
assets of the Company, on a fully consolidated basis, as of the date of
determination thereof, or (y) $5,000,000 for the period commencing on January 1,
1996 and ending on December 31, 1996 or (z) $5,000,000 plus 50% of cumulative
consolidated net income for the period commencing January 1, 1997, minus 100% of
cumulative consolidated net loss for the consolidated entities for such period,
as calculated on a cumulative basis as of the end of each fiscal quarter of the
consolidated entities with reference to the financial statements for such
quarter.

The initial Bank Credit Agreement was amended on June 28, 1996 and February 28,
1997 to modify certain covenants. Prior to the execution of these amendments,
the Company was in technical noncompliance with certain of the financial
covenants contained therein. At June 28, 1997 and September 27, 1997, the
Company was not in compliance with certain of its covenants under the Bank
Credit Agreement. Such events of noncompliance at June 28, 1997 and September
27, 1997 have been waived by the syndicate of lenders who are parties to the
Bank Credit Agreement. The Company is exploring alternatives to reduce the
likelihood of future non-compliance with the covenants of the Bank Credit
Agreement, including amending the covenants or restructuring the long-term debt.
Management believes that it will be successful in these efforts, although an
agreement has not yet been reached.


The Bank Credit Agreement requires the Company to prepay the principal
installments on Term Loan A and Term Loan B, in inverse order of the scheduled
maturities, from the net cash proceeds from the sale or liquidation of the
Tarboro Facility, Rockville Office and venture capital portfolio investments.
Subsequent to September 27, 1997, payments totaling $2,357,328 were made
against term loans representing net cash proceeds from liquidation of venture
capital portfolio investments.  Accordingly, this amount was included in
current maturities of long-term debt at September 27, 1997.

Available cash has been adequate to sustain the Company's operations, cash
used for debt service and debt reduction under the Bank Credit Agreement
and cash used to maintain a reduced capital expenditure plan have strained the
Company's available liquid assets. Management expects improvements in cash
generation from improved operating results, strict cost containment, reduction
in inventories, and judicious review of its short term capital expenditure
plans. While discretionary cash expenditures will require constraint and
careful planning, management believes that funds generated from operations and
funds available under the Bank Credit Agreement will be sufficient to satisfy
the Company's liquidity requirements for at least the next year.


                                       18

<PAGE>   19


ACCOUNTING PRONOUNCEMENTS

Statement of Financial Accounting Standards No. 128, Earnings Per Share, will
require the presentation of basic and diluted net income per share. Basic net
income per share excludes common stock equivalents such as options, while
diluted net income per share considers the possible effect of all common shares
which potentially can be issued. The statement will be effective for financial
statements for periods ending after December 15, 1997, including interim
periods. Early adoption of this Statement is not permitted. The Company's
computation of basic and diluted EPS under SFAS No. 128 for the nine months
ended September 27, 1997 and September 28, 1996 will not be materially different
than EPS previously reported.

Statement of Financial Accounting Standards No. 129 will establish standards for
disclosing information about an entity's capital structure and is effective for
periods ending after December 15, 1997.

Statement of Financial Accounting Standards No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
gains, expenses, losses) in a full set of general purpose financial statements
and is effective for fiscal years beginning after December 15, 1997.

Statement of Financial Accounting Standards No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. The statement is effective for financial
statements for periods beginning after December 31, 1997.

Management of the Company has not yet assessed the impact of the above
Statements of Financial Accounting Standards on the Company's financial
statements.

OTHER MATTERS

The Company is periodically involved in legal proceedings arising in the
ordinary conduct of business. Management does not expect that such proceedings
will have a material adverse effect on the Company's consolidated financial
position or results of operations. During 1997, management became aware of
certain industrial espionage activities that targeted the Company and several
other textile manufacturers, allegedly carried out by agents of a large
competitor. Management is reviewing the impact that this alleged activity may
have had on the Company's operations and is exploring possible remedies.

RISKS AND UNCERTAINTIES

Except for historical information contained herein, the matters set forth in
this report are forward looking statements which are subject to certain risks
and uncertainties that could cause actual results to differ materially from
those in, or which could be expected based on, such forward looking statements.
The Company's expectations regarding future sales and profits assume, among
other things, reasonable continued growth in the general economy which affects
demand for the Company's products, and reasonable stability in raw materials
pricing, changes in which affect customer purchasing decisions as well as the
Company's prices and margins. The costs and benefits of the Company's
discontinuance of Jupiter venture capital investments and the disposition of the
Tarboro Facility may vary from the Company's expectations due to various factors
such as: higher or lower than anticipated proceeds from the sale of assets; the
extent of management's ability to control duplication of costs, inefficiencies
and overhead during the period of phasing out operations; and the difficulties
inherent in forecasting the operating results of an operating mode different
from that which exists at the time the forecast is made. For a further
discussion of risks and uncertainties associated with the Company's business,
readers are referred to the cautionary statement set forth in Item 1 of the
Company's annual report on Form 10-K for the year ended December 28, 1996, which
cautionary statement is incorporated by reference herein.


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<PAGE>   20


                   JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES

                           PART II. OTHER INFORMATION


ITEM 1.       LEGAL PROCEEDINGS

No reportable legal proceedings arose in the quarter ended June 28, 1997.


ITEM 6.       EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits

         +10.25   Employment Agreement with James J. Murray dated September 15,
                  1997
           11     Statements of Computation of Per Share Earnings
           27     Financial Data Schedule (Filed Electronically)


(b)      Reports on Form 8-K

         (i) No reports on Form 8-K were filed during the quarter ended June 28,
1997.


--------------------------------------------------------------------------------

+    Management contract or compensatory plan or arrangement required to be
     filed as an exhibit to Form 10-Q pursuant to Item 6(a).


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<PAGE>   21


JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES

                                   SIGNATURES



    Pursuant to the requirements of the Securities and Exchange Act of 1934, the
undersigned has duly caused this report to be filed on its behalf by the
undersigned hereto duly authorized.













                                             JOHNSTON INDUSTRIES, INC.




Dated: November 12, 1997                     By: /s/ James J. Murray
                                                 ------------------------------
                                                 James J. Murray
                                                 Executive Vice President
                                                 Chief Financial Officer




Dated: November 12, 1997                     By: /s/ James J. Murray
                                                 ------------------------------
                                                 James J. Murray
                                                 (Principal Accounting Officer)


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