<PAGE>   1

                                   FORM 10-Q

                                 UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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


[X] For the quarterly period ended July 4, 1998
    -------------------------------------------

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)


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 July 4,
1998 was 10,742,772 shares.
<PAGE>   2


                   JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES
                                        
                               INDEX TO FORM 10-Q
                                        
                                        
                         PART I - FINANCIAL INFORMATION
                                        
                                        
<TABLE>
<CAPTION>
                                                                       Page(s)
<S>       <C>                                                          <C>
ITEM 1.   CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:

             Condensed Consolidated Balance Sheets
               July 4, 1998 and January 3, 1998                            3

             Condensed Consolidated Statements of Operations
               Three Months and Six Months ended July 4, 1998 and
               June 28, 1997                                               4

             Condensed Consolidated Statements of Cash Flows
               Six Months ended July 4, 1998 and June 28, 1997           5-6

             Notes to Condensed Consolidated Financial Statements       7-11


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
             CONDITION AND RESULTS OF OPERATIONS                       12-18



                          PART II - OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS                                                19

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS              19

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K                                 19

         SIGNATURE PAGE                                                   20

         EXHIBIT 10.28 - AMENDMENT #4 DATED APRIL 2, 1998
             TO BANK CREDIT AGREEMENT                                  21-29

         EXHIBIT 11 - STATEMENT OF COMPUTATION OF
             EARNINGS PER SHARE                                           30

         EXHIBIT 27 - FINANCIAL DATA SCHEDULE
             (For SEC Use Only)                                           31
</TABLE>



                                       2
<PAGE>   3


                         PART I - FINANCIAL INFORMATION

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                        
                   JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
                                  (UNAUDITED)


<TABLE>
<CAPTION>
                                                                  JULY 4,              JANUARY 3,
                                                                    1998                  1998
                                                               ------------          -------------
<S>                                                            <C>                   <C>

ASSETS
CURRENT ASSETS:
  Cash and Cash Equivalents                                      $    284               $  2,284
  Accounts and Notes Receivables Net of Allowance for
    Doubtful Accounts of $1,929 and $2,016                         33,078                 34,283
  Inventories                                                      51,126                 51,083
  Income Taxes Receivable                                           2,653                  4,838
  Deferred Income Taxes                                               304                    406
  Assets Held for Sale                                              4,573                  5,010
  Prepaid Expenses and Other                                        5,905                  5,200
                                                                 --------               --------
    Total Current Assets                                           97,923                103,104

Property, Plant and Equipment - Net                               109,059                113,783

Goodwill                                                           11,164                 11,477
Intangible Asset - Pension                                          1,882                  1,882
Other Assets                                                        4,120                  4,542
                                                                 --------               --------
Total Assets                                                     $224,148               $234,788
                                                                 ========               ========


LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts Payable                                               $ 12,536               $ 17,088
  Accrued Expenses                                                 10,474                 10,264
  Revolving Credit Loan                                            70,388                 73,995
  Current Maturities of Long-Term Debt                              6,389                  3,393
                                                                 --------               --------
    Total Current Liabilities                                      99,787                104,740

Long-Term Debt - Less Current Maturities                           57,419                 61,688
Other Liabilities                                                   9,562                  9,022
Deferred Income Taxes                                               9,759                 10,214

STOCKHOLDERS' EQUITY:
  Common Stock, Par Value $.10 per share; Authorized,
    20,000,000 Shares; Issued 12,467,691                            1,246                  1,246
  Additional Paid-In Capital                                       21,445                 21,445
  Retained Earnings                                                32,955                 34,458
                                                                 --------               --------
    Total                                                          55,646                 57,149
  Less Treasury Stock; 1,724,919 shares                            (8,025)                (8,025)
                                                                 --------               --------
    Total Stockholders' Equity                                     47,621                 49,124
                                                                 --------               --------
Total Liabilities and Stockholders' Equity                       $224,148               $234,788
                                                                 ========               ========
</TABLE>

See notes to Condensed Consolidated Financial Statements



                                       3
<PAGE>   4
                   JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES
          CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                       FOR THE THREE MONTHS ENDED       FOR THE SIX MONTHS ENDED  
                                                                       --------------------------       ------------------------- 
                                                                         JULY 4,        JUNE 28,         JULY 4,        JUNE 28,  
                                                                           1998           1997             1998           1997    
                                                                       ------------   -----------       ----------     ---------- 
<S>                                                                    <C>            <C>               <C>            <C>        
                                                                                                                                  
Net Sales                                                              $  69,063      $  87,724         $  148,902     $  174,502  
                                                                       ---------      ---------         ----------     ----------
                                                                                                                                
                                                                                                                                 
Costs and Expenses:
Cost of Sales, excluding Depreciation and Amortization                    55,472         73,320            120,439        143,099

Selling, General and Administrative                                        6,874          7,287             13,927         13,451
Depreciation and Amortization                                              5,037          5,336             10,287         10,676
Restructuring and Impairment Charges                                          --          7,081                100          7,081
                                                                       ---------      ---------         ----------     ----------
Total Costs and Expenses                                                  67,383         93,024            144,753        174,307
                                                                       ---------      ---------         ----------     ----------
Income (Loss) from Operations                                              1,680         (5,300)             4,149            195

Other Expenses (Income):
  Interest Expense                                                         3,451          3,449              6,664          6,858
  Interest Income                                                           (417)          (100)              (496)          (456)
  Other -- Net                                                              (228)           468                440            338
                                                                       ---------      ---------         ----------     ----------
Total Other Expenses--Net                                                  2,806          3,817              6,608          6,740

Realized and Unrealized Investment Gain                                       --            219                 --            193
                                                                       ---------      ---------         ----------     ----------


Equity in Earnings of Equity Investments                                      63                                63               
                                                                       ---------      ---------         ----------     ----------

Loss from Continuing Operations before Tax Benefit                        (1,063)        (8,898)            (2,396)        (6,352)

Benefit for Income Taxes                                                    (495)        (2,263)              (893)        (1,267)
                                                                       ---------      ---------         ----------     ----------
Loss from Continuing Operations                                             (568)        (6,635)            (1,503)        (5,085)


DISCONTINUED OPERATIONS:
Income (Loss) from Discontinued Operations of Jupiter
 National net of applicable income tax (benefit) of $4
 for the three months and ($5) for the six months                             --              6                 --            (11)

Gain on Disposal of Jupiter National net of applicable
 income tax of $65 for the three months and $60 for
 six months                                                                   --            146                 --            137
                                                                       ---------      ---------         ----------     ----------
Income from Discontinued Operations                                           --            152                 --            126
                                                                       ---------      ---------         ----------     ----------

Net Loss                                                                    (568)        (6,483)            (1,503)        (4,959)

Dividends on Preferred Stock                                                  --             40                 --             81
                                                                       ---------      ---------         ----------     ----------
Net Loss Available to Common Stockholders                              $    (568)     $  (6,523)        $   (1,503)    $   (5,040)
                                                                       =========      =========         ==========     ==========

Earnings (Loss) Per Common Share-Basic:
 Loss from Continuing Operations                                       $   (0.05)     $   (0.64)        $    (0.14)    $    (0.50)
 Discontinued Operations                                                      --           0.01                 --           0.01
                                                                       ---------      ---------         ----------     ----------
  Net Loss Per Common Share-Basic                                      $   (0.05)     $   (0.63)        $    (0.14)    $    (0.49)
                                                                       =========      =========         ==========     ==========

Dividends Per Share                                                    $      --      $    0.20                 --     $     0.20
                                                                       =========      =========         ==========     ==========

Weighted Average Number of Common Shares Outstanding                      10,743         10,404             10,743         10,392
                                                                       =========      =========         ==========     ==========
</TABLE>

See notes to Condensed Consolidated Financial Statements


                                       4
<PAGE>   5
                   JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES
           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                                 (IN THOUSANDS)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                           FOR THE SIX MONTHS ENDED
                                                                     ------------------------------------
                                                                        JULY 4,                 JUNE 28,
                                                                         1998                     1997
                                                                     -------------            -----------
<S>                                                                  <C>                      <C>

OPERATING ACTIVITIES:
CONTINUING OPERATIONS:
 Net Loss from Continuing Operations                                 $      (1,503)           $    (5,085)
 Adjustments to Reconcile Net Loss from Continuing Operations
  to Net Cash Provided by Operating Activities:
  Depreciation and Amortization                                             10,287                 10,676
  Restructuring and Impairment Charges                                          --                  7,081
  Provisions for Bad Debts                                                     363                    220
  Loss on Disposal of Fixed Assets                                             262                     --
  Net Unrealized Gain on Portfolio Investments                                  --                   (193)
  Undistributed Income in Equity Investments                                   (63)                    --
  Changes in Operating Assets and Liabilities:
   Accounts and Notes Receivables                                              842                 (6,736)
   Inventories                                                                 (43)                 3,979
   Deferred Income Taxes                                                      (353)                (2,097)
   Prepaid Expenses and Other Assets                                          (413)                 1,902
   Accounts Payable                                                         (3,376)                (1,906)
   Accrued Expenses                                                            210                 (1,418)
   Income Taxes Receivable                                                   2,185                  1,723
   Other Liabilities                                                           540                 (1,038)
   Other -- Net                                                                 24                     --
                                                                     -------------            -----------
   Total Adjustments                                                        10,105                 12,193
                                                                     -------------            -----------
   Net Cash Provided by Continuing Operations                                8,602                  7,108


DISCONTINUED OPERATIONS:
 Loss from Discontinued Operations                                              --                    (11)
 Gain on Disposal of Discontinued Operations                                    --                    137
 Cash Provided by Discontinued Operations                                       --                  1,904
                                                                     -------------            -----------
   Net Cash Provided by Discontinued Operations                                 --                  2,030
                                                                     -------------            -----------
   Net Cash Provided by Operating Activities                                 8,602                  9,138

INVESTING ACTIVITIES:
 Additions to Property, Plant and Equipment                                 (5,512)                (5,100)
 Decrease in Non-Operating Accounts Payable                                   (816)                (1,001)
 Investment Sales                                                              630                     --
                                                                     -------------            -----------
  Net Cash Used in Investing Activities                                     (5,698)                (6,101)
</TABLE>
                                                                       Continued


                                       5
<PAGE>   6


                   JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES
          CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                                 (In Thousands)
                                  (Unaudited)


<TABLE>
<CAPTION>
                                                                                    For the Six Months Ended   
                                                                                 ------------------------------
                                                                                 July 4,               June 28,
                                                                                  1998                   1997  
                                                                                 -------               --------
<S>                                                                              <C>                   <C>
FINANCING ACTIVITIES:
  Principal Payments of Term Loan                                                   (704)                (5,264)
  Net (Payments) Borrowings under Revolving Line of Credit Arrangement            (4,200)                 3,500
  Proceeds from Issuance of Common Stock                                              --                     36
  Dividends Paid                                                                      --                 (2,157)
                                                                                 -------                -------
     Net Cash Used in Financing Activities                                        (4,904)                (3,885)

NET DECREASE IN CASH AND CASH EQUIVALENTS                                         (2,000)                  (848)

CASH AND CASH EQUIVALENTS
  Beginning of Period                                                              2,284                  1,748
                                                                                 -------                -------       
  End of Period                                                                  $   284                    900
                                                                                 =======                =======

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
  Cash Paid (Received) During the Six Months for:
   Interest                                                                      $ 6,106                  6,613
                                                                                 =======                =======
   Income Taxes                                                                  $(2,525)                  (771)
                                                                                 =======                =======

See notes to Condensed Consolidated Financial Statements                                             Concluded
</TABLE> 






                                       6
<PAGE>   7
                   JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


1.   BASIS OF PRESENTATION

     The accompanying condensed consolidated financial statements as of and for
     the three months and six months ended July 4, 1998 and June 28, 1997 are
     unaudited. The July 4, 1998 statement include the accounts of Johnston
     Industries, Inc. ("Johnston"), its direct wholly owned subsidiary,
     Johnston Industries Alabama, Inc. ("JI Alabama") and its indirect wholly
     owned subsidiaries, Johnston Industries Composite Reinforcements, Inc.
     ("JICR") and Greater Washington Investments, Inc. ("GWI") (collectively,
     the "Company"). All significant intercompany balances have been eliminated
     in consolidation.

     The June 28, 1997 statements include the accounts of Johnston, JI Alabama,
     JICR, GWI and JI Alabama's former wholly owned subsidiary, T.J. Beall
     Company ("TJ Beall").

     The accompanying unaudited condensed consolidated financial statements
     have been prepared in accordance with the instructions to Form 10-Q and do
     not include all of the information in footnotes required by generally
     accepted accounting principles for complete financial statements. In the
     opinion of management, the unaudited condensed consolidated financial
     statements reflect all adjustments and 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 three months and six months ended July 4, 1998
     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 January 3, 1998. 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
     January 3, 1998.

2.   ACCOUNTING PRONOUNCEMENTS

     In February 1997, the Financial Accounting Standards Board issued
     Statement of Financial Accounting Standards ("SFAS") 129, "Disclosure of
     Information about Capital Structure." This statement establishes standards
     for disclosing information about an entity's capital structure and is
     effective for periods ending after December 15, 1997. The Company has
     adopted this statement effective for the first quarter of 1998.

     In February 1997, the Financial Accounting Standards Board issued SFAS 130
     "Reporting Comprehensive Income." This statement 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 financial statements for periods beginning
     after December 15, 1997. The Company has adopted this statement effective
     for the first quarter of 1998. For the three and six month periods ended
     July 4, 1998 and June 28, 1997, there are no differences between
     comprehensive income and net income.

     In June 1997, the Financial Accounting Standards Board issued SFAS 131
     "Disclosure about Segments of an Enterprise and Related Information." This
     statement 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 Company in required to present the segment
     disclosures in the current fiscal year, however, disclosure in interim
     financial reports issued to shareholders is not required during the year
     of adoption. This statement is effective for financial statements for
     periods beginning after December 15, 1997.


                                       7
<PAGE>   8
     In March 1998, the Accounting Standards Executive Committee of the
     American Institute of Certified Public Accountants issued Statement of
     Position ("SOP") 98-1 "Accounting for the Costs of Computer Software
     Developed or Obtained for Internal Use." This statement, which provides
     guidance on accounting for the costs of computer software developed or
     obtained for internal use, defines "internal use," provides guidance for
     determination of capital and expense costs, and is effective for fiscal
     years beginning after December 15, 1998, but earlier adoption is
     encouraged. The Company has adopted this statement effective for the first
     quarter of 1998.

3.   DISCONTINUANCE OF THE VENTURE CAPITAL SEGMENT

     Concurrent with the acquisition of Jupiter National, Inc. (the "Jupiter
     Acquisition") in March 1996, 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 accordingly, 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 portfolio investments were reclassified
     from net assets of discounted operations to assets held for sale on the
     consolidated balance sheet. Beginning with the quarter ended June 28,
     1997, the results of continuing operations for these remaining portfolio
     investments have been reported as income from continuing operations in the
     consolidated statements of operations and prior periods presented have
     been restarted accordingly.

     For the six months ended June 28, 1997, the loss from discounted
     operations was $11,000 net if income tax benefit of $5,000.

     Also for the six months ended June 28, 1997, the gain on disposal of
     Jupiter was $137,000 net of income tax of $60,000.

4.   T.J. BEALL COMPANY

     On March 25, 1996, the Company acquired all of the outstanding common
     stock of TJ Beall, a broker in cotton by-products located in West Point,
     Georgia, for shares of nonvoting convertible preferred stock with an
     estimated value of $3,250,000. In September 1997, an agreement was reached
     culminating in the sale of substantially all of the assets and current
     liabilities of TJ Beall back to a member of the Beall family. In
     conjunction with the sale, the Company recorded a note receivable in the
     amount of $1,500,000 payable in annual installments of $300,000 plus
     interest at 10% per annum over a five year period.

5.   RESTRUCTURING CHARGES AND LOSSES ON IMPAIRMENT

     During the Second Quarter of 1997, the Company announced its plan to cease
     manufacturing operations at its Langdale facility, close its outlet store
     in West Point, Georgia and realign its divisions. The Langdale facility
     had contained both weaving operations and yarn manufacturing operations.
     The yarn manufacturing operations were eliminated while selected
     equipment and associated product offerings of the weaving operations
     were relocated to other of the Company's facilities. The remainder of the
     weaving operation at the Langdale facility was closed. The Langdale
     facility has been retained as warehouse, distribution and potential
     future  manufacturing space for JI Alabama's Fiber Products Division. The
     sale of the outlet store building closed during December 1997. Beginning
     in the third quarter of 1997 and continuing through the first quarter of
     1998, severance reserves were accrued to restructuring costs as employees
     were notified of the elimination of their job. During the six months ended
     July 4, 1998, the Company recorded restructuring charge totaling $100,000
     which included $175,000 in severance costs related to closure of the
     Langdale facility and the 1997 realignment of divisions less a favorable
     adjustment of $75,000 to the impairment reserve for Jupiter's former
     office building in Rockville, Maryland, which was sold in February 1998.


                                       8



<PAGE>   9

6.   INVENTORIES

     Inventories consisted of the following at July 4, 1998 and January 3, 1998:


<TABLE>
<CAPTION>

                                                    July 4, 1998        JANUARY 3, 1998
                                                    ------------        ---------------
<S>                                                 <C>                 <C>
Inventories--FIFO Cost Flow Assumption
  Finished Goods                                    $ 29,086,000        $ 30,367,000
  Work-In Process                                      9,392,000          10,581,000
  Raw Materials and Supplies                          16,298,000          13,607,000               
                                                    ------------        ------------
                                                      54,776,000          54,555,000
Less LIFO Reserve                                     (3,650,000)         (3,472,000)
Inventories--LIFO Cost Flow Assumption              $ 51,126,000        $ 51,083,000 
                                                    ============        ============
</TABLE>


7.   LONG-TERM FINANCING AND SHORT-TERM BORROWINGS

     Long-term debt and short-term borrowings consisted of the following at
     July 4, 1998 and January 3, 1998:

<TABLE>
<CAPTION>
                                                    July 4, 1998        JANUARY 3, 1998
                                                    ------------        ---------------
<S>                                                 <C>                 <C>
  Term Loans                                        $ 62,336,000        $ 63,040,000
  Revolving Credit Loan                               70,388,000          73,995,000
  Purchase Money Mortgage Debt                           957,000           1,000,000
  Industrial Development Note
    (net of unamortized discount)                        515,000             491,000
  Other Loans (mortgage)                                       0             550,000
                                                    ------------        ------------
  Total                                              134,196,000         139,076,000
    Less Current Maturities                           (6,389,000)         (3,393,000)
    Less Revolving Credit Loan
     classified as Current                           (70,388,000)        (73,995,000)
                                                    ------------        ------------
                                                    $ 57,419,000        $ 61,688,000 
                                                    ============        ============
</TABLE>


     The Company has a credit agreement with a syndicate of lenders (the "Bank
     Credit Agreement"), which was entered into on March 28, 1996. The Bank
     Credit Agreement, as amended to date, provides aggregate loans of up to
     $160,000,000 including a revolving credit loan (the "Revolving Credit
     Facility") 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"). The
     maturity date for all borrowings under the Bank Credit Agreement is July
     1, 2000.

     As of July 4, 1998, the Company had outstanding borrowings under the Bank
     Credit Agreement of $132,724,000, and $8,882,000 unused under the Revolver
     net of $730,000 of standby letters of credit. Upon the sale in February
     1998 of Jupiter's former office in Rockville, Maryland, the $550,000
     mortgage associated with that property was discharged.


     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, places a
     limit on the Company's level of capital expenditures and its ability to
     effect certain types of mergers or acquisitions, and permits the Company
     to pay dividends on its Common Stock provided certain financial tests are
     met. Under these financial tests, at July 4, 1998, the Company was not
     permitted to declare or pay dividends.

     The Bank Credit Agreement has been amended several times to modify certain
     covenants, the latest amendment of which was executed on March 30, 1998
     (the "1998 Amendment") to modify certain covenants. Prior to the execution
     of these amendments, the Company was in technical noncompliance with 




                                       9
<PAGE>   10

     certain of the financial covenants contained therein or noncompliance was
     considered to be imminent. In addition to covenant modifications, the 1998
     Amendment also included increases in interest rates, effective April 5,
     1998, ranging from 1/4% to 1% over the rates in effect prior to that date,
     revision of the final maturity date for all obligations under the Bank
     Credit Agreement and modifications to the scheduled repayment of term
     loans which decreased required payments for 1998 and 1999. All past events
     of noncompliance as described above have been waived by the syndicate of
     lenders who are parties to the Bank Credit Agreement. As of July 4, 1998,
     the Company was in compliance with the covenants under the Bank Credit
     Agreement. The Company continues to explore alternatives which would
     reduce the likelihood of future non-compliance with the covenants of the
     Bank Credit Agreement, including restructuring the long-term debt.
     Management believes that it will be successful in these efforts. However,
     no assurance can be given that an acceptable alternative can be agreed
     upon or that any amendment or restructuring can be achieved on terms
     acceptable to the Company.

     In connection with the 1998 Amendment, approximately $480,000 of deferred
     costs were charged to Other - net during the first quarter of 1998. This
     amount represents the unamortized balance of the original loan costs,
     which were to be amortized over the term of the Bank Credit Agreement, and
     the new deferred loan costs of approximately $647,000 were capitalized in
     connection with the 1998 Amendment and will be amortized over the
     remaining term of the Bank Credit Agreement.

     The 1998 Amendment required the Company to adopt new cash management
     procedures which were adopted in the third quarter of 1998. The new
     procedures include the daily application of customer remittances received
     by Johnston's lockbox against the Revolving Credit Facility, which
     management believes will generally enhance the Company's availability
     under the Revolving Credit Facility. As a result of this Lock-box
     arrangement and in compliance with the Emerging Issues Task Force Issue
     No. 95-22, "Balance Sheet Classification of Borrowings Outstanding under
     Revolving Credit Agreements that Include both a Subjective Acceleration
     Clause and a Lock-Box Arrangement," the revolving credit loan, which has a
     maturity date of July 1, 2000, has been classified as a current liability.

     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 significant assets.


8.   EARNINGS PER SHARE  

     Earnings per share is not presented on a diluted basis as the effect of
     dilutive securities was anti-dilutive due to net losses.







                                       10
<PAGE>   11
9.   INCOME TAXES

     The benefit for income taxes from continuing operations as computed under
     SFAS No. 109, "Accounting for Income Taxes", is comprised of the following
     for the six months ended July 4, 1998 and June 28, 1997:

<TABLE>
<CAPTION>
                                                            1998              1997    
                                                         ---------       -----------  
          <S>                                            <C>             <C>          
          Federal:                                                                    
            Current                                      $(829,000)      $   640,000  
            Deferred                                       (27,000)       (2,075,000) 
                                                         ---------       -----------  
                                                          (856,000)       (1,435,000) 
                                                                                      
          State:                                                                      
            Current                                        (15,000)          370,000  
            Deferred                                       (22,000)         (202,000) 
                                                         ---------       -----------  
                                                           (37,000)          168,000  
                                                                                      
          Provision (benefit) for income taxes           $(893,000)      $(1,267,000) 
                                                         =========       ===========  
</TABLE>

     The reconciliation of the Company's effective income tax rate to the
     Federal statutory rate from continuing operations of 34% for the six months
     ended July 4, 1998 and June 28, 1997 follows:

<TABLE>
<CAPTION>
                                                           1998             1997                
                                                        ---------       -----------             
     <S>                                                <C>             <C>                     
     Federal income taxes at statutory rate             $(815,000)      $(2,160,000)                  
     State income taxes, net of Federal tax benefit       (24,000)          110,000                    
     Amortization of Goodwill                             106,000           798,000                       
     Other -- Net                                        (160,000)          (15,000)                        
                                                        ---------       -----------                        
                                                        $(893,000)      $(1,267,000)                         
                                                        ---------       -----------                           
     Effective rate                                          37.3%             20.0%                           
                                                        =========       ===========                       
</TABLE>
  
     The effective tax rates in 1998 and 1997 were distorted by the amortization
     of goodwill, which is not tax deductible. The 1998 tax rate also reflects
     partial recognition of a tax refund due as a result of a net operating loss
     carryback.

10.  RELATED PARTY TRANSACTIONS

     Redlaw Industries, Inc. ("Redlaw"), a stockholder, is the commissioned
     sales agent for the Company for substantially all sales of the Company's
     products into Canada under the terms of a non-exclusive sales agency
     agreement. For the six months ended July 4, 1998, there were no sales to
     Redlaw. As of July 4, 1998 commissions payable to Redlaw were $21,164.
     Johnston maintains inventory at a public warehouse in Ontario, Canada which
     is supervised by Redlaw. At July 4, 1998, there was approximately $186,035
     of inventory located at the warehouse in Canada.

                                      11
<PAGE>   12


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 six months ended July 4, 1998 and June 28, 1997 are unaudited. The
July 4, 1998 statements include the accounts of Johnston Industries, Inc.
("Johnston"), its direct wholly owned subsidiary, Johnston Industries Alabama,
Inc. ("JI Alabama") and its indirect wholly owned subsidiaries, Johnston
Industries Composite Reinforcements, Inc. ("JICR") and Greater Washington
Investments, Inc. ("GWI") (collectively, the "Company").

The June 28, 1997 statements include the accounts of Johnston, JI Alabama, JICR,
GWI and JI Alabama's former indirect wholly owned subsidiary, T.J. Beall Company
("TJ Beall").

Concurrent with the acquisition of Jupiter National, Inc. (the "Jupiter
Acquisition") in March 1996, 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 were recorded as discontinued operations.

At June 28, 1997, the remaining portfolio investments were reclassified from net
assets of discontinued operations to assets held for sale on the consolidated
balance sheet. Beginning with the quarter ended June 28, 1997, the results of
continuing operations for these remaining portfolio investments have been
reported as income from continuing operations in the consolidated statements of
operations and prior periods presented have been restated accordingly.

Results of Operations

The second quarter operating results reflect year to year quarterly improvement
notwithstanding a decline in revenue, both before and after considering the
significant restructuring charges recorded in the second quarter of 1997.
Revenue decline from the second quarter of 1997 is attributed to the elimination
of unprofitable operations and product lines during the second half of 1997, one
less operating week during the second quarter of 1998 compared to the second
quarter of 1997, and shortfalls in sales for the Greige Fabrics Division due to
lost production from a tornado which hit the Company's Opp Mill in April and
weakness in indirect exports from the currency and financial instability in
Russia and Eastern Europe. June marked the fourth consecutive month of improved
financial performance at the Finished Fabrics Division. Margins have improved
for the Finished Fabrics Division while off quality and customer returns have
declined. The Company's Fiber Products Division improved its performance for the
second consecutive quarter through cost containment and favorable manufacturing
variances. JICR, the Company's fastest growing division, set a new record for
sales in the first six months of 1998 and reached a record level of customer
backlog by mid-year.

        For the three month and six month periods ended July 4, 1998, the
        Company's net sales decreased $18,661,000 (21.3%) and $25,600,000
        (14.7%) respectively, compared with the three months and six months
        ended June 28, 1997. Three factors contributed significantly to the
        change between periods. The normal plant shutdown for the week of July 4
        fell in the June accounting period for 1998 resulting in the second
        quarter 1998 having 12 weeks of sales and production as opposed to 13
        weeks for the second quarter of 1997. This resulted in approximately $5
        million less revenues that would have been realized had the shutdown
        week been in the third quarter of 1998. Economic difficulties in Eastern
        Europe as noted above resulted in approximately $5 to $6 million reduced
        sales by the Greige Fabrics Division for the second quarter. Further, TJ
        Beall, which was sold in September 1997, recorded sales of $6,489,000
        and $11,623,000 for the three and six months ended June 28, 1997.


                                       12
<PAGE>   13
An analysis of changes in net sales by market is as follows:

<TABLE>
<CAPTION>
                                                 2ND QTR 1998                YTD 1998
                                               INCR/(DECR) FROM          INCR/(DECR) FROM
                                                 2ND QTR 1997                YTD 1997
                                               ----------------          ----------------
                         <S>                   <C>                       <C>
                         Automotive                  301,000                   775,000
                         Industrial               (2,886,000)               (4,379,000)                                
                         Home Furnishings         (5,627,000)               (5,281,000)
                         Apparel                  (1,673,000)                 (618,000)
                         Specialty Markets        (8,677,000)              (15,016,000)
                         Miscellaneous               (99,000)               (1,081,000)
                                               ----------------          ----------------
                         Net Sales               (18,661,000)              (25,600,000)
                                               ================          ================
</TABLE>


*    Sales of automotive fabrics for the quarter and for the first six months
     reflect some increased activity plus an unusual increase in demand for a
     long standing product which has been on the decline for several years.

*    Sales of industrial fabrics for the three and six months ended July 4,
     1998 decreased 15.6% and 11.9% respectively as compared to the same
     periods in 1997. Of the industrial fabrics, only sales of wallcovering
     substrate grew, while sales of fabrics for footwear, filtration, rubber
     products and abrasives declined. Filtration fabrics generated record sales
     in 1997 and have now receded to normal levels. Of the other industrial
     fabrics which have declined, although no assurances can be given,
     management believes that these declines are only temporary.

*    Sales of home furnishing fabrics receded by 13.0% and 6.0% from the levels
     reported for the three months and six months ended June 28, 1997. Reduced
     indirect export sales, as noted above, contributed significantly to the
     decline in home furnishing sales for the second quarter and year to date
     periods of 1998. Sales of certain discontinued window covering fabrics for
     1998 are sharply reduced from the prior year. New cotton and poly/cotton
     upholstery fabrics introduced by the Finished Fabrics Division in the
     first quarter of 1998, are in response to changing consumer preference away
     from rayon, however, these lines have not yet achieved the expected market
     penetration.  Decline in sales of home furnishing fabrics has been
     mitigated in part by increased sales of greige (unfinished - for further
     processing) upholstery fabrics and top of the bed fabrics by the Greige
     Fabrics Division plus increased sales of napery by the Finished Fabrics
     Division.

*    The Greige Fabrics Division capitalized on certain short term
     opportunities to sell apparel fabrics at attractive margins during 1997
     and early 1998. Demand from these orders has now been filled and apparel
     activity has returned to a normal level.

*    Reduced sales to specialty markets reflect the disposition of TJ Beall in
     September 1997 as noted above, but also reflects discontinued sales yarn
     business formerly located at the Langdale facility, which was closed in
     1997. Sales of $1,733,000 and $3,779,000 for yarn produced at Langdale
     were recorded for the three months and six months ended June 28, 1997.
     Sales of composite reinforcement fabrics for the three and six months
     ended July 4, 1998 grew by 19.7% and 33.0%, respectively, over levels
     recorded for the three and six months ended June 28, 1997.

*    Sales of miscellaneous fabrics, which now represent less than 1% of total
     sales, shows declines from 1997 levels but reflect the Company's
     discontinuance of certain unprofitable products characterized by short
     runs and low margins.

The Company's backlog of customer orders was $69,422,000 at July 4, 1998
compared to $69,447,000 at January 3, 1998 and $65,141,000 million at June 28,
1997, after exclusion of TJ Beall which was sold in September 1997. Change in
the components of order backlog reflect change in product mix, a portion of
which results from products discontinued by the Company in connection with the
1997 realignment.

Gross margin, excluding depreciation, as a percentage of net sales for the three
and six months ended July 4, 1998 was 19.7% and 19.1%, respectively, compared to
16.4% and 18.0% for the same periods in 1997. The increases in gross margin
reflect elimination of unprofitable products, increased manufacturing
efficiencies and reductions in raw material prices. The 1997 realignment
included closure of the Langdale facility, elimination of certain unprofitable
product lines, and relocation of select manufacturing equipment and products to
the Southern Phenix Facility and to the Micolas Facility. During the first
quarter of 1998, the Finished Fabrics Division incurred the negative impact of
costs for administering the phase out of the discontinued products plus
inefficiencies associated

                                       13
<PAGE>   14
with absorption of the relocated production. The second quarter of 1998 reflects
improvement as these transitional activities were substantially completed during
the first quarter of 1998. Contributing in part to the improvement in margins
was the reclassification of costs for corporate human resources functions which
were included in costs of sales for 1997, but have been included in general and
administrative costs for 1998.

For the three months ended July 4, 1998, selling, general and administrative
expenses decreased by $413,000 from $7,287,000 in the prior year period, but
for the six months ended July 4, 1998, increase $476,000 over the $13,451,000
recorded for the six months ended June 28, 1997. Beginning in April 1997, the
Company incurred professional fees associated with the 1997 realignment. Both
the first and second quarters through June of 1998 include charges for such
professional services as compared to 1997 when such charges were recorded in
the second quarter but not in the first quarter. Use of these professional
services had begun to decline significantly by April of 1998. Additionally, for
the six months ended July 4, 1998, approximately $450,000 was included in
general and administrative expenses for corporate human resource functions
which had been included in cost of sales for 1997.

During the Second Quarter of 1997, the Company announced its plan to cease
manufacturing operations at its Langdale facility, close its outlet store in
West Point, Georgia and realign its divisions. The Langdale facility had
contained both weaving operations and yarn manufacturing operations. The yarn
manufacturing operations were eliminated while selected equipment and associated
product offerings of the weaving operations were relocated to other of the
Company's facilities. The remainder of the weaving operation at the Langdale
facility was closed. The Langdale facility has been retained as a warehouse,
distribution and potential future manufacturing space for JI Alabama's Fiber
Products Division. The sale of the outlet store building closed during December
1997. Beginning in the third quarter of 1997 and continuing through the first
quarter of 1998, severance reserves were accrued as restructuring costs as
employees were notified of the elimination of their jobs. During the first six
months of 1998, the Company recorded restructuring charges totaling $100,000
which included $175,000 in severance costs related to closure of the Langdale
facility and the 1997 realignment of divisions less of favorable adjustment of
$75,000 to the impairment reserve for Jupiter's former office building in
Rockville, Maryland which was sold in February 1998.

For the three months and six months ended July 4, 1998, depreciation and
amortization expense was $5,037,000 and $10,287,000, respectively, reductions
of $299,000 and $389,000 from the same periods in 1997. These declines are
principally due to the reduction in depreciable assets from the sale of the
assets of TJ Beall in September 1997 and also from the closure of the Langdale
facility which was completed in the fourth quarter of 1997. The decline was
partially offset by the impact of additional depreciation resulting from the
1997 and 1998 capital investment plans. Capital investment for the six months
ended July 4, 1998 was $5,512,000 compared to $5,100,000 million for the six
months ended June 28, 1997.

Interest expense was $3,451,000 for the three months and $6,664,000 for the six
months ended July 4, 1998. Interest expense for the first six months of 1998
represents only a minimal decrease of $194,000 from the level recorded for the
same period in 1997. Changes in interest expense include both reduced average
borrowings and increased average rates associated with the March 30, 1998
amendment to the Bank Credit Agreement, as discussed below. Obligations under
the Company's Bank Credit Agreement at July 4, 1998 were $14,050,000 and
$4,311,000 less than obligations at June 28, 1997 and January 3, 1998
respectively. Additionally, the $550,000 mortgage associated with Jupiter's
former office in Rockville, Maryland, was discharged upon its sale in February
1998.

In connection with the 1998 amendment to the Company's Bank Credit Agreement,
approximately $480,000 of deferred loan costs were charged to Other - net
during the first quarter of 1998. This amount represents the unamortized
balance of the original loan costs, which were to be amortized over the term of
the Bank Credit Agreement, and the new deferred loan costs of approximately
$647,000 were capitalized in connection with the 1998 Amendment and are being
amortized over the remaining term of the Bank Credit Agreement which now
matures on July 1, 2000. The Other-net for three months ended July 4, 1998
includes approximately $250,000 for insurance proceeds receivable as a result
of storm damage at the Opp Mill as noted above.


                                       14
<PAGE>   15
DISCONTINUED OPERATIONS

Concurrent with the acquisition of Jupiter National, Inc. (the "Jupiter
Acquisition") in March 1996, 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 accordingly, 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 were recorded as discontinued operations.

At June 28, 1997, the remaining portfolio investments were reclassified from
net assets of discontinued operations to assets held for sale on the
consolidated balance sheet. Beginning with the quarter ended June 28, 1997,
the results of ongoing operations for these remaining portfolio investments
have been reported as income from continuing operations on the consolidated
statements of operations and prior periods presented have been restated
accordingly.

For the six months ended June 28, 1997, the loss from discontinued operations
was $11,000 net of income tax benefit of $5,000.

Also for the six months ended June 28, 1997, a gain on disposal of Jupiter's
venture capital investment segment was recorded for $137,000 net of income tax
of $60,000 in final settlement of reserves established in 1996 for loss on
disposal.

LIQUIDITY AND CAPITAL RESOURCES

The Company's needs for capital resources have been filled through cash
generated from operating activities and have been supported by availability of
borrowings under its Bank Credit Agreement, which was entered into on March 28,
1996. The Bank Credit Agreement, as amended to date, provides aggregate loans
of up to $160,000,000 including a revolving credit loan (the "Revolving Credit
Facility") 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"). The maturity
date for all borrowings under the Bank Credit Agreement is July 1, 2000.

As of July 4, 1998, the Company had outstanding borrowings under the Bank
Credit Agreement of $132,724,000, and $8,882,000 unused under the Revolver net
of $730,000 of standby letters of credit. Principal payments since January 3,
1998 have reduced the outstanding amount of the Revolver by $3,607,000. Upon
the sale in February 1998, of Jupiter's former office in Rockville, Maryland,
the $550,000 mortgage associated with that property was discharged.

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, places a limit on the
Company's level of capital expenditures and its ability to effect certain types
of mergers or acquisitions, and permits the Company to pay dividends on its
Common Stock provided certain financial tests are met. Under these financial
tests, at July 4, 1998, the Company was not permitted to declare and pay
dividends.


The Bank Credit Agreement has been amended several times to modify certain
covenants, the latest amendment of which was executed on March 30, 1998 (the
"1998 Amendment") 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 or noncompliance was considered to be
imminent. In addition to covenant modifications, the 1998 Amendment also
included increases in interest rate, effective April 5, 1998, ranging from 1/4%
to 1% over the rates in effect prior to that date, revision of the final
maturity date for all obligations under the Bank Credit Agreement and
modifications to the scheduled repayment of term loans which decreased required
payments for 1998 and 1999. All past events of noncompliance as described above
have been waived by the syndicate of lenders who are parties to the Bank Credit
Agreement. As of July 4, 1998, the Company was in compliance with the covenants
under the Bank Credit Agreement. The Company continues to explore alternatives
which would reduce the likelihood of future non-compliance with the covenants
of the Bank Credit Agreement, including restructuring the long-term debt.
Management believes that it will be successful in these efforts. However, no
assurance can be given that an acceptable alternative can be agreed upon or
that any amendment or restructuring can be achieved on terms acceptable to the
Company.


                                       15
<PAGE>   16
In connection with the 1998 Amendment, approximately $480,000 of deferred loan
costs were charged to Other -- net during the first quarter of 1998. This amount
represents the unamortized balance of the original loan costs, which were to be
amortized over the term of the Bank Credit Agreement, and the new deferred loan
costs of approximately $647,000 were recorded in connection with the 1998
Amendment and are being amortized over the remaining term of the Bank Credit
Agreement.

The 1998 Amendment required the Company to adopt new cash management procedures
which were adopted in the third quarter of 1998. The new procedures include the
daily application of customer remittances received by Johnston's lockbox against
the Revolving Credit Facility, which management believes will generally enhance
the Company's availability under the Revolving Credit Facility. As a result of
this lock-box arrangement and in compliance with the Emerging Issues Task Force
Issue No. 95-22, ""Balance Sheet Classification of Borrowings Outstanding under
Revolving Credit Agreements that Include both a Subjective Acceleration Clause
and a Lock-Box Arrangement," the revolving credit loan, which has a maturity
date of July 1, 2000, has been classified as a current liability.

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
significant assets.

Cash flow provided by operating activities declined by $536,000 compared to the
first six months of 1997, however, 1997 included $2,030,000 net cash provided by
discontinued operations. Although total long term financing and short term
borrowings have been reduced by approximately 10% over the last twelve months,
the Company continues to be highly leveraged in comparison to periods preceding
March of 1996. In consideration of the high levels of indebtedness, management
has focused efforts on reduction of debt and associated debt service costs.
Although 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 in the Company's 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, judicious review of its short term capital expenditure plans,
and potential use of leasing programs in lieu of cash purchases for portions of
its capital investment plan. Although no assurance can be given that cash
provided by operating and financing activities will be sufficient, Management
believes that through careful planning and constraint of discretionary cash
expenditures, cash generated by operations and cash available under the Bank
Credit Agreement will be sufficient to satisfy the Company's liquidity
requirements for at least the next year.

ACCOUNTING PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") 129, "Disclosure of Information about
Capital Structure." This statement establishes standards for disclosing
information about an entity's capital structure and is effective for periods
ending after December 15, 1997. The Company has adopted this statement effective
for the first quarter of 1998.

In February 1997, the Financial Accounting Standards Board issued SFAS 130
"Reporting Comprehensive Income." This statement 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 financial statements for periods beginning after December
15, 1997. The Company has adopted this statement effective for the first quarter
of 1998. For the three months ended April 4, 1998 and March 29, 1997, there are
no differences between comprehensive income and net income.

In June 1997, the Financial Accounting Standards Board issued SFAS 131
"Disclosure about Segments of an Enterprise and Related Information." This
statement 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 Company is
required to present the segment disclosures in the current fiscal year, however,
disclosure in interim financial reports issued to shareholders is not required
during the year of adoption. This statement is effective for financial
statements for periods beginning after December 15, 1997.


                                       16
<PAGE>   17
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("(SOP")
98-1 "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This statement, which provides guidance on accounting for the
costs of computer software developed or obtained for internal use, defines
"internal use," provides guidance for determination of capital and expensed
costs, and is effective for fiscal years beginning after December 15, 1998, but
earlier adoption is encouraged. The Company has adopted this statement effective
for the first quarter of 1998.

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 has engaged counsel and advisors to
assist in exploring possible remedies.

On Friday, April 17, 1998, a tornado struck the Company's Opp Mill in Opp,
Alabama, damaging the structure's roof and outside walls as well as damaging
certain inventory, electronic controls and production equipment contained within
the facility. The Opp Mill, which runs a seven day, 24 hour production schedule,
resumed partial production on Monday, April 20, 1998 and had all major equipment
back in service by Friday, April 24, 1998. Management believes that
substantially all losses associated with this storm will be recovered through
property and business interruption insurance, however, no assurances can be
given as to when or whether acceptable settlements will be reached with the
Company's insurance provider.

YEAR 2000 INITIATIVES

As a result of computer programs which historically were written using a two
rather than four digit convention to define the year component of dates, a
concern commonly known as the Year 2000 ("Year 2000") issue has arisen globally.
Computer programs and equipment that use a two digit convention may not be able
to differentiate between the 20th and 21st centuries (e.g. "00" could be either
1900 or 2000). This could result in system failures or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.

The Company has reviewed significant systems which are not presently Year 2000
compliant. Two major software replacement projects remain for the Company, both
of which involve replacing current systems with purchased systems that are Year
2000 compliant. A major software replacement project is underway at the
Company's Finished Fabrics Division and upon its completion, the Company intends
to replace the major systems at its Fiber Products Division, which are
considerably less sophisticated than the Finished Fabrics Systems.

The Company screens all new equipment purchases and presently is reviewing its
systems and operations to determine what systems imbedded in sophisticated
production equipment or support equipment may be vulnerable to Year 2000 issues.
This review will be followed with a formal communication program with equipment
vendors to certify that the systems are Year 2000 compliant. Remediation steps,
if any, will be implemented, though there can be no guarantee that vendors will
successfully remediate the equipment systems and that any failure to timely
remediate would not have a material effect on the Company's systems.

As a result of the upgrades described above and assuming the remaining projects
are completed in satisfactory manner, management currently believes that the
Year 2000 issue will not pose significant operational problems for the
Company's computer systems. The Company anticipates completing the Year 2000
project no later than August, 1999. Management believes that the cost of Year
2000 modifications will not have a material effect on results of operations.

There can be no guarantee that the software replacement projects will be
successful or that the vendors supplying software to the Company will provide
new software releases that are Year 2000 compliant. In addition, there can be no
assurances that there will not be problems identified when screening production
and support equipment and ancillary systems and that such problems will not have
a material effect on the operating results.

                                       17
<PAGE>   18

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 may vary from the
Company's expectations with respect to anticipated proceeds from the sale of
assets. 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 January
3, 1998, which cautionary statement is incorporated by reference herein.

                                       18
<PAGE>   19
                   JOHNSTON INDUSTRIES, INC. AND SUBSIDIARIES

                           PART II. OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

No reportable legal proceedings arose in the quarter ended July 4, 1998.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

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

On May 27, 1998, the Annual Meeting of Stockholders was held at the Company's
offices located at 105 Thirteenth Street, Columbus, Georgia 31901. There were
present in person or by proxy 9,870,196 shares of Common Stock entitled to vote.
The following shares were voted for election of nominees for Director:

<TABLE>
<CAPTION>

          NOMINEE                  NO. OF SHARES IN FAVOR             WITHHELD
          -------                  ----------------------             --------
          <S>                      <C>                                <C>
          J. Reid Bingham                9,821,967                     48,229
          David L. Chandler              9,801,027                     69,169
          John A. Friedman               9,822,767                     47,429
          William J. Hart                9,823,967                     46,229
          Gaines R. Jeffcoat             9,825,467                     44,729
          D. Clark Ogle                  9,824,467                     45,729
          C. Philip Stanley              9,826,467                     43,729
</TABLE>

There were no abstentions or broker non-votes applicable to the election of
Directors. All the nominees were elected as Directors.

ITEM 5.  OTHER INFORMATION

None.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

     10.28   Amendment #4 dated April 2, 1998 to Bank Credit Agreement

     11      Statements of Computation of Per Share Earnings

     27      Financial Data Schedule (Filed Electronically)

(b)  Reports on Form 8-K

     (i) Notice of change in the Registrant's certifying accountant, as filed
         on Form 8-K dated June 2, 1998, is incorporated by reference herein.

_______________________________________________________________________________


                                       19
<PAGE>   20
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:  August 18, 1998                 By:  /s/ JAMES J. MURRAY
                                             -------------------
                                             James J. Murray
                                             Executive Vice President and
                                             Chief Financial Officer


                                        By:  /s/ JAMES J. MURRAY
                                             -------------------
                                             James J. Murray
                                             (Principal Accounting Officer)


                                       20