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


                                   FORM 10-Q
                                        

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


For the Quarterly Period Ended:  June 28, 1998     Commission File 
                                                   Number:  33-93494
--------------------------------------------------------------------------------

                                CROWN PAPER CO.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


             Virginia                                54-1752385
--------------------------------------------------------------------------------
     (State or other jurisdiction of               (I.R.S. Employer
     incorporation or organization)               Identification No.)


      300 Lakeside Drive, Oakland, CA                     94612-3592
--------------------------------------------------------------------------------
     (Address of principal executive offices)             (Zip Code)


              (510) 874-3400
--------------------------------------------------------------------------------
     (Registrant's telephone number, including area code)


                                 Not Applicable
--------------------------------------------------------------------------------
             (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
                                                      ---------         --------
                                                                                
Number of shares of no par value common stock outstanding as of the close of
business on August 7, 1998:

              One (1) share, which is owned by Crown Vantage Inc.
              --------------------------------------------------
               
<PAGE>
 
                                     INDEX

                                CROWN PAPER CO.



PART I:  Financial Information

         Item 1.    Financial Statements

            *    Condensed Consolidated Balance Sheets - June 28, 1998 and
                 December 28, 1997.

            *    Condensed Consolidated Statements of Operations Three months
                 and six months ended June 28, 1998 and June 29, 1997.

            *    Condensed Consolidated Statements of Cash Flows - Six months
                 ended June 28, 1998 and June 29, 1997.

            *    Notes to Condensed Consolidated Financial Statements.

          Item 2.    Management's Discussion and Analysis of Financial Condition
                     and Results of Operations.

PART II:  Other Information

          Item 6.  Exhibits and Reports on Form 8-K

SIGNATURES

                                       2
<PAGE>
 
PART I  --  FINANCIAL INFORMATION
------                           
ITEM 1  --  FINANCIAL STATEMENTS
------                          

                                CROWN PAPER CO.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                           (in thousands of dollars)

<TABLE>
<CAPTION>
ASSETS                                                     June 28, 1998       December 28, 1997
                                                           --------------      -----------------
                                                            (Unaudited)
                                                           --------------
<S>                                                        <C>             <C>
Current Assets:
     Cash and cash equivalents                                  $ 10,162            $ 11,415
     Accounts receivable, net                                     42,745              40,787
     Inventories                                                 103,470             104,117
     Prepaid expenses and other current assets                     6,363               7,399
     Deferred income taxes                                        13,156              14,480
                                                                --------            --------
          Total current assets                                   175,896             178,198
Property, plant and equipment, net                               597,396             621,276
Other assets                                                      39,688              38,090
Unamortized debt issue costs                                      12,923              14,039
Intangibles, net                                                  28,414              28,977
                                                                --------            --------
          Total Assets                                          $854,317            $880,580
                                                                ========            ========

LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
     Accounts payable                                           $ 42,147            $ 54,181
     Accrued liabilities                                          85,016              80,358
     Current portion of long-term debt                             1,000               1,000
                                                                --------            --------
          Total current liabilities                              128,163             135,539
Long-term debt                                                   445,562             430,878
Accrued postretirement benefits other than pensions              101,662             102,397
Other long-term liabilities                                       12,701              12,732
Deferred income taxes                                             74,421              88,427
                                                                --------            --------
          Total Liabilities                                      762,509             769,973
                                                                --------            --------
Shareholder's Equity:
     Preferred Stock, no par value;
       Authorized - 5,000 shares;
       Issued and outstanding - None
     Common Stock, no par value;
       Authorized - 1 share;
       Issued and outstanding at June 28, 1998
          and December 28, 1997                                  135,286             132,698
     Minimum pension liability                                      (330)               (330)
     Cumulative foreign currency translation adjustment            1,252               1,338
     Retained deficit                                            (44,400)            (23,099)
                                                                --------            --------
                                                                  91,808             110,607
                                                                --------            --------
Total Liabilities and Shareholder's Equity                      $854,317            $880,580
                                                                ========            ========
</TABLE>


See notes to condensed consolidated financial statements.

                                       3
<PAGE>
 
                                CROWN PAPER CO.
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
          For the Second Quarter (13 weeks) and Six Months (26 weeks)
                     Ended June 28, 1998 and June 29, 1997
                           (in thousands of dollars)

                                               

<TABLE>    
<CAPTION>  
                                             
                                                             Second Quarter                        Six Months
                                                        --------------------------        ------------------------
                                                         1998              1997             1998            1997
                                                        --------          --------        --------        --------
<S>                                             <C>               <C>               <C>             <C>
Net Sales                                               $215,413          $224,932       $ 437,219       $ 453,573
Cost of goods sold                                       203,431           214,180         416,239         425,657
                                                        --------          --------       ---------       ---------
Gross margin                                              11,982            10,752          20,980          27,916
Selling and administrative expenses                       15,003            12,263          29,789          28,769
                                                        --------          --------       ---------       ---------
         Operating Loss                                   (3,021)           (1,511)         (8,809)           (853)
Interest expense                                         (12,289)          (12,628)        (24,452)        (25,043)
Other income, net                                            443               717             490             858
                                                        --------          --------       ---------       ---------
          Loss before income taxes                       (14,867)          (13,422)        (32,771)        (25,038)
Benefit for income taxes                                  (5,204)           (4,898)        (11,470)         (9,150)
                                                        --------          --------       ---------       ---------
               NET LOSS                                 $ (9,663)         $ (8,524)      $ (21,301)      $ (15,888)
                                                        ========          ========       =========       ========= 
 
 
 
</TABLE>



See notes to condensed consolidated financial statements.

                                       4
<PAGE>
 
                                CROWN PAPER CO.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                         For the Six Months (26 weeks)
                     Ended June 28, 1998 and June 29, 1997
                           (in thousands of dollars)
<TABLE>
<CAPTION>
                                                                  Six Months
                                                              -------------------
                                                               1998        1997
                                                              -------     ------- 
                                                                  (Unaudited)
<S>                                                        <C>          <C>
Cash Provided by (Used for) Operating Activities:
     Net loss                                                $(21,301)   $(15,888)
     Items not affecting cash:
         Depreciation and cost of timber harvested             42,030      41,228
         Amortization of goodwill and other intangibles           562         562
         Non-cash interest                                      1,302       1,110
         Other, net                                             2,867       1,061
     Changes in current assets and liabilities:
         Accounts receivable                                   (1,958)      3,827
         Inventories                                              647       1,635
         Other current assets                                   2,359       2,353
         Accounts payable                                     (10,574)      1,496
         Other current liabilities                              4,656         215
     Decrease in deferred income taxes                        (14,005)    (10,128)
     Other, net                                                (2,447)     (1,703)
                                                             --------    -------- 
         Cash Provided by Operating Activities                  4,138      25,768
                                                             --------    --------
Cash Provided by (Used for) Investing Activities:
     Expenditures for property, plant and equipment           (20,429)    (30,494)
     Other, net                                                   538       1,556
                                                             --------    --------
         Cash Used for Investing Activities                   (19,891)    (28,938)
                                                             --------    --------
Cash Provided by (Used for) Financing Activities:
     Proceeds from draw down of Revolving Credit               67,000      68,000
     Repayments of Revolving Credit                           (52,000)    (54,000)
     Repayments of Term Loans and other long-term debt           (500)     (3,718)
                                                             --------    -------- 
         Cash Provided by Financing Activities                 14,500      10,282
                                                             --------    --------                              
Increase (decrease) in cash and cash equivalents               (1,253)      7,112
Cash and cash equivalents at beginning of year                 11,415       1,175
                                                             --------    -------- 
Cash and cash equivalents at end of period                   $ 10,162    $  8,287
                                                             ========    ========

</TABLE>


See notes to condensed consolidated financial statements.

                                       5
<PAGE>
 
                                CROWN PAPER CO.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)


NOTE 1  --  ORGANIZATION AND BASIS OF PRESENTATION
------                                            

     The accompanying unaudited condensed consolidated financial statements
include the consolidated operations, assets and liabilities of Crown Paper Co.,
and Crown Paper Co.'s consolidated subsidiaries. Crown Paper Co. and
subsidiaries  (the "Company") is a wholly owned subsidiary of Crown Vantage Inc.
("Crown Vantage" or "the Parent").  The Parent became an independent company
after the Board of Directors of James River Corporation of Virginia ("James
River"), now known as Fort James Corporation ("Fort James"), approved the spin-
off of assets, liabilities and operations which comprised a substantial part of
James River's Communication Papers Business and the paper-based part of its Food
and Consumer Packaging Business ("Predecessor Business").  At the close of
business on August 25, 1995, James River distributed to its common shareholders
all of the outstanding shares of the Parent (the "Distribution").  The
Distribution was made in the form of a tax-free dividend on the basis of one
share of the Parent's common stock for every ten shares of James River common
stock.  A total of 8,446,362 shares of the Parent's common stock was issued and
began trading on NASDAQ on August 28, 1995.

     The accompanying condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X.  Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for annual
financial statements.  The condensed consolidated balance sheet as of December
28, 1997 was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles for annual
financial statements.  In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.  Operating results for the quarter and six months ended June 28,
1998 are not necessarily indicative of the results that may be expected for the
year ended December 27, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in Crown Paper Co.'s Form
10-K for the year ended December 28, 1997.  Certain 1997 amounts have been
reclassified to conform with the 1998 presentation.

 
NOTE 2  --  INCOME TAX
------                

     The income tax benefits for the quarter and six months ended June 28, 1998
and June 29, 1997 were provided based on the Company's estimated annual tax
rates of 35.0% and 36.5%, respectively.

                                       6
<PAGE>
 
<TABLE>
<CAPTION>
NOTE 3  --  LONG TERM DEBT
------      
<S>                                                       <C>       <C>
 
Consolidated long-term debt consists of the following:
                                                          June 28,   December 28,
                                                            1998         1997
                                                          --------     --------
                                                       (in thousands of dollars)
     Bank Credit Facility:
         Revolving credit, due 2002                       $ 60,000     $ 45,000
         Term Loan B, due 2003                              97,500       98,000
                                                          --------     --------
                                                           157,500      143,000
     11% Senior Subordinated Notes, due 2005               250,000      250,000
     Industrial Revenue Bonds, payable to 2026              39,062       38,878
                                                          --------     --------
                                                           446,562      431,878
 
     Less current portion                                    1,000        1,000
                                                          --------     --------
                                                          $445,562     $430,878
                                                          ========     ========
</TABLE>

     On March 18, 1998, Crown Vantage and the Company entered into an agreement
with Fort James related to Crown Vantage's 11.45% Senior Pay-in-Kind Notes ("PIK
Notes") which are held by Fort James.  The agreement provides for the delivery
to Crown Vantage and Crown Paper Co. of PIK Notes totaling $25 million and $8
million, respectively, in exchange for the mutual release from a variety of
claims that have arisen from prior transactions between Fort James and Crown
Vantage.  In addition, Crown Vantage was granted an option to purchase the
remaining PIK Notes and accrued interest (the notes having a face amount
totaling $100 million at June 28, 1998) for a fixed price of $80 million in
cash.  The option must be exercised by September 30, 1998 and funding of the
purchase price must occur on or before October 31, 1998.  Pursuant to the
agreement, funds would be obtained through an equity offering, asset sales, or a
combination thereof. Delivery of the $33 million in PIK Notes and potentially
the funding of the option are subject to consent by the Company's bondholders
and bank group.  There is no assurance that the Company will be successful in
raising the required funding in time to exercise the option (see "Note 9").

     Maturities of long-term debt, excluding the revolving credit, for the next
five fiscal year ends are:  1999 - $1.0 million; 2000 - $1.3 million; 2001 - $.8
million; 2002 - $47.0 million and 2003 - $47.5 million.
 
NOTE 4  --  INVENTORIES
------
<TABLE>
<CAPTION>

                                                                June 28, 1998       December 28, 1997
                                                               --------------      -----------------
                                                                    (in thousands of dollars)
<S>                                                          <C>            <C>
Raw materials                                                     $ 24,268           $ 27,911
Work in process                                                      6,468              7,038
Finished goods                                                      46,807             45,936
Stores and supplies                                                 37,123             35,569
                                                                  --------           --------
                                                                   114,666            116,454
Reduction to state inventories at last-in, first-out cost          (11,196)           (12,337)
                                                                  --------           --------
                                                                  $103,470           $104,117
                                                                  ========           ======== 
</TABLE>

                                       7
<PAGE>
 
NOTE 5  --  LITIGATION AND ENVIRONMENTAL MATTERS
------                                          

   The Company is a party to various legal proceedings generally incidental to
its business and is subject to a variety of environmental protection statutes
and regulations.  As is the case with other companies in similar industries, the
Company faces exposure from actual or potential claims and legal proceedings
involving environmental matters.  Although the ultimate disposition of legal
proceedings cannot be predicted with certainty, it is the present opinion of the
Company's management that the outcome of any claim which is pending or
threatened, either individually or on a combined basis, will not have a
materially adverse effect on the consolidated financial position of the Company
but could materially affect consolidated results of operations in a given year.

   The Company has accrued estimated landfill site restoration, post-closure and
monitoring costs totaling $11.9 million at June 28, 1998 and $12.0 million at
December 28, 1997.  In addition, the Company has been identified as a
potentially responsible party ("PRP"), along with others, under the
Comprehensive Environmental Response, Compensation and Liability Act or similar
federal and state laws regarding the past disposal of wastes at 20 sites in the
United States.  The Company has previously settled its remediation obligations
at 12 of those sites.  At 7 other sites, the Company is one of many potentially
responsible parties and its alleged contribution to the site and remediation
obligation is not considered significant.  At one other site, remedial
investigation is underway and a loss estimate for the potential remediation
effort costs is not yet possible.  However, the Company's accrual for the
remediation investigation effort was $.4 million at June 28, 1998 and $.6
million at December 28, 1997.  The liabilities can change substantially due to
such factors as the solvency of other potentially responsible parties, the
Company's share of responsibility, additional information on the nature or
extent of contamination, methods and associated costs of remediation required,
and other actions by governmental agencies or private parties.  While it is not
feasible to predict the outcome of all environmental liabilities, based on its
most recent review, management estimates the Company's share of the costs of
investigation and remediation of the known sites will not have a material
adverse effect upon the consolidated financial condition of the Company.

   Due to uncertainties associated with remediation activities, regulations,
technologies, and the allocation of costs among various other parties, actual
costs to be incurred at identified sites may vary from estimates.  Therefore,
management is unable to determine if the ultimate disposition of all known
environmental liabilities will have a material adverse effect on the Company's
consolidated results of operations in a given year.  In addition, as is the case
with most manufacturing and many other entities, there can be no assurance that
the Company will not be named as a PRP at additional sites in the future or that
the costs associated with such additional sites would not be material.

   The Environmental Protection Agency signed final rules affecting pulp and
paper industry discharges of wastewater and gaseous emissions ("Cluster Rules")
which became effective on April 15, 1998.  These Cluster Rules require changes
in the pulping, bleaching and/or wastewater treatment processes presently used
in some U.S. pulp and paper mills, including some of the Company's mills.  Based
on management's understanding of the rules, the Company estimates that
approximately $40 million of capital expenditures may be required to comply with
the rules with compliance dates beginning in 1999 and extending over the next
two to five years.  As of June 28, 1998 the Company has incurred $1.2 million in
capital expenditures for compliance with the Cluster Rules.  There are risks and
uncertainties associated with the Company's estimate that could cause total
capital expenditures and timing of such expenditures to be materially different
from current estimates, including changes in technology, interpretation of the
rules by government agencies that is substantially different from the Company's
interpretation, or other items.

                                       8
<PAGE>
 
NOTE 6 -- STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121
------                                                       

   Statement of Financial Accounting Standards No. 121 ("Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of")
requires that the Company assess the recoverability of its investments in long-
lived assets to be held and used in operations whenever events or circumstances
indicate that their carrying amounts may be impaired.  Such assessment requires
that the future cash flows expected to result from use of the assets are
estimated and an impairment loss recognized when future cash flows are less than
the carrying value of such assets. Estimating future cash flows requires the
Company to estimate useful lives of its long-lived assets, future production
volumes and costs, future sales volumes, demand for the Company's product mix
and prices that reflect the use of its long-lived assets and market conditions.
Although the Company believes it has a reasonable basis for its estimates, it
is reasonably possible that the Company's estimate of future cash flows could
change from current estimates which could result in recognizing, in future
periods, a material impairment loss on its long-lived assets.

NOTE 7 -- COMPREHENSIVE INCOME
------                        

   The Company adopted Statement of Financial Accounting Standards No. 130
("SFAS No. 130") "Reporting Comprehensive Income" in the first quarter of 1998.
SFAS No. 130 establishes standards for the reporting and displaying of
comprehensive income and its components; however, the adoption of SFAS No. 130
had no impact on the Company's net income or shareholders' equity.
Comprehensive income for the Company consists of net income, foreign currency
translation adjustments and minimum pension liability adjustments.

   During the second quarter of 1998 and 1997, the Company's total comprehensive
loss was $10.3 million and $7.7 million, respectively, and for the six months
ended June 28, 1998 and June 29, 1997, the Company's total comprehensive loss
was $21.4 million and $17.8 million, respectively.

NOTE 8  WORK FORCE REDUCTION
-------                     

   During the second quarter of 1998 the Company accrued $2.5 million relating
to the announced work force reduction of 5%.  The accrual is for anticipated
expenses resulting from the work force reduction primarily for severance and
benefit payments to the approximately 180 affected employees.  Employment
classes affected include both hourly and salaried employees from manufacturing,
maintenance, and office staff.  As of June 28, 1998 approximately $200,000 had
been paid and the remainder will be paid during the second half of 1998 and into
early 1999.

NOTE 9  SUBSEQUENT EVENTS
------                   

   On July 28, 1998, the Company announced that it is no longer actively
exploring separating its specialty papers businesses from the Company's St.
Francisville, La., pulp and paper mill.  As the Company previously reported on
May 5, 1998, it was considering such a transaction, including the possible
divestiture of the St. Francisville facility, as part of a transaction to
significantly reduce the Company's debt, including the repurchase of the
Parent's PIK Notes.  The Company will continue to actively explore various
alternatives to fund the repurchase of the Parent's PIK Notes.  There is no
assurance that the Company will be successful in structuring a transaction of
the type described, that the Company will locate a third party or parties
willing to engage in such a transaction, that the repurchase of the Parent's PIK
Notes will be realized or that the Company will successfully and in a timely
manner conclude any such transaction.

                                       9
<PAGE>
 
ITEM 2  --  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
------                                                                       
FINANCIAL CONDITION

   Crown Paper Co. and subsidiaries (the "Company") are a major producer of
value-added paper products for a diverse array of end-uses.  The Company's two
business sectors and corresponding principal product categories are (i) printing
and publishing papers, for applications such as special interest magazines,
books, custom business forms and corporate communications and promotions (e.g.,
annual reports and stationery); and  (ii) specialty papers, principally for food
and retail packaging applications and conversion into such items as coffee
filters, cups and plates.

   The Company operates 10 facilities using 31 paper machines and its paper
production is approximately 75% integrated with the Company's pulp operations.
The Company's two largest facilities are integrated operations located in St.
Francisville, Louisiana and Berlin and Gorham, New Hampshire.  St. Francisville
produces coated groundwood papers for magazines and catalogs and uncoated
specialty converting papers.  Berlin-Gorham primarily produces uncoated printing
and publishing papers as well as  market pulp.  The Company also produces
uncoated printing and publishing papers at its non-integrated facilities in
Adams, Massachusetts; Ypsilanti, Michigan; and Dalmore and Guardbridge,
Scotland.  The Company's food and retail packaging papers are produced primarily
at non-integrated facilities in Port Huron and Parchment, Michigan, and Milford,
New Jersey.  In addition to its primary paper-making operations, the Company
operates a cast-coating facility in Richmond, Virginia.


RESULTS OF OPERATIONS
---------------------

   The Company's net sales revenue and tons sold for each business sector as
well as pulp are as follows:
<TABLE>
<CAPTION>
 
                                      Net Sales and Tonnage by Sector
                                        for the Three Months Ended
                                  ---------------------------------------
                                     June 28, 1998        June 29, 1997
                                  ----------------       ----------------
                                   Tons       Sales      Tons     Sales
                                  -------    --------   -------  -------- 
                                           (thousands)          (thousands)
<S>                               <C>      <C>          <C>      <C>
Printing and Publishing Papers
      Coated groundwood            71,747    $ 59,097    70,936  $ 47,882
      Uncoated                     59,446      56,296    60,117    58,592
 
 
Specialty Papers
      Food and retail packaging    54,071      66,885    58,298    74,424
      Converting                   34,853      26,723    45,059    39,333
 
Pulp                               25,059       8,914    22,980     8,235
Intracompany Eliminations          (6,957)     (2,502)   (9,954)   (3,534)
                                  -------    --------   -------  -------- 
                                  238,219    $215,413   247,436  $224,932
                                  =======    ========   =======  ======== 
</TABLE>

                                       10
<PAGE>
 
<TABLE>
<CAPTION>
                                          Net Sales and Tonnage by Sector
                                            for the Three Months Ended
                                      ------------------------------------------
                                        June 28, 1998           June 29, 1997
                                      --------------------    ------------------
                                       Tons        Sales       Tons      Sales
                                      -------     --------    -------   -------- 
                                                (thousands)          (thousands)
<S>                               <C>          <C>          <C>      <C>
Printing and Publishing Papers
      Coated groundwood               143,040     $117,536    142,856   $ 95,126
      Uncoated                        122,859      116,445    123,624    120,056
 
Specialty Papers
      Food and retail packaging       107,415      134,526    117,281    149,707
      Converting                       70,241       56,012     88,674     80,009
 
Pulp                                   52,444       18,667     44,635     15,996
Intracompany Eliminations             (16,466)      (5,967)   (20,479)    (7,321)
                                      -------     --------    -------   --------  
                                      479,533     $437,219    496,591   $453,573
                                      =======     ========    =======   ======== 
</TABLE>


Net Sales
---------

    The Company's net sales decreased 3.6% to $437.2 million for the six months
ended June 28, 1998 as compared to $453.6 million for the same period in 1997.
The decrease in net sales is primarily due to a 3.4% decrease in tons sold from
the first six months of 1997 compared to the first six months of 1998.  Net
sales declined 4.2% to $215.4 million during the second quarter of 1998 as
compared to the second quarter of 1997.  The decrease in net sales during the
second quarter of 1998 as compared to the same period in 1997 is primarily due
to a 3.7% decrease in tons sold.

    Net sales of coated groundwood paper (which is used principally in the
production of magazines and catalogs) for the six month period ended June 28,
1998 was $117.5 million, an increase of 23.6% as compared to the same period in
1997.  Net sales increased 23.4% from the second quarter of 1997 as compared to
the second quarter of 1998.  The increases in net sales are due to average net
sales price per ton increases of 23.4% and 22.0% in the first six months of 1998
and the second quarter of 1998, respectively, as compared to the comparable
periods in the prior year.

    Net sales of uncoated printing and publishing papers in the first two
quarters of 1998 decreased 3.0% to $116.4 million compared to the first two
quarters of 1997.  The decrease in the first six months of 1998 from the first
six months of 1997 is primarily due to an average sales price per ton decrease
of 2.4%.  Net sales during the second quarter of 1998 decreased 3.9% as compared
to the second quarter of 1997.  The decrease in net sales is due to a 2.8%
decrease in average net sales price per ton and a decrease of approximately 700
tons (or 1.1%) during the second quarter of 1998 as compared to the second
quarter of 1997.  The current economic crisis in Asia coupled with a strong U.S.
dollar have resulted in lower exports by U.S. paper producers and increased
imports into the U.S. from both Asia and Europe.  This abundance of uncoated
freesheet paper supply has negatively impacted demand and pricing for the
Company's uncoated printing and publishing papers, resulting in depressed prices
for the Company's targeted grades.  The current supply of these papers in the
market place has also resulted in the Company's partial shift in mix to lower
value added grades in order to maintain volume during this period of
supply/demand imbalance, which also negatively impacted the Company's average
net selling price.

                                       11
<PAGE>
 
    Food and retail packaging paper net sales totaled $134.5 million during the
first six months of 1998, a $15.2 million decline from the same period in 1997.
The 10.1% decrease in net sales is the result of an 8.4% decrease in tons sold
and a 1.9% decrease in average net sales price per ton during the six months
ended June 28, 1998 as compared to the six months ended June 29, 1997.  Net
sales during the second quarter of 1998 decreased 10.1% or $7.5 million as
compared to the second quarter of 1997.  The decrease in net sales during the
second quarter of 1998 as compared to the same period in 1997 is due to a 7.3%
decrease in tons sold and a 3.1% decrease in average net sales price per ton.
The current economic crisis in Asia and the strong U.S. dollar have also
negatively impacted demand and pricing for the Company's specialty packaging
papers.

    Net sales of specialty converting papers during the six months ended June
28, 1998 were $56.0 million, a 30.0% decrease compared to the six months ended
June 29, 1997.  Net sales decreased 32.1% to $26.7 million from $ 39.3 million
for the quarters ended June 28, 1998 and June 29, 1997, respectively.  The
decrease during the first two quarters of 1998 compared to the first two
quarters of 1997 is primarily the result of a 20.8% decrease in tons sold and a
decrease of 11.6% in average net sales price per ton.  The decrease in net sales
during the second quarter of 1998 compared to the second quarter of 1997 is due
to an average price per ton decrease of 12.2% and a decrease in tons sold of
22.7%.  The decreased volume is primarily due to the decision by certain
customers to integrate backwards their operations, negatively affecting our
specialty converting papers sales.  The decrease in average net sales price per
ton is primarily due to the lower tons sold from the Company's cast-coating
operations whose papers generally command premium pricing.  The Company
continues to aggressively pursue replacing the lost tonnage with new product
development and trials of engineered papers in progress.  However, demand for
the cast-coating products remains particularly weak with marginal improvement
expected in the second half of 1998 as compared to the first half of 1998.

    Net sales of pulp increased to $12.7 million for the six months ended June
28, 1998 as compared to $8.7 million for the six months ended June 29, 1997.
Tons of pulp sold is a function of market demand as well as managing, to the
Company's best advantage, internal pulp integration.  Tons sold in the first six
months of 1998 increased 48.9% when compared to the same period of 1997.  The
increase in tons sold is primarily due to the availability of pulp for sale that
in the prior period was used internally primarily for the manufacturing of
toweling.  Net sales increased 36.4% during the second quarter of 1998 as
compared to the second quarter of 1997.  The increase in net sales is primarily
due to an increase in tons sold of 39.0% for the reasons discussed above.

<TABLE>
<CAPTION>
 
 OPERATING INCOME (LOSS)
-------------------------
 
                                         Operating Income (Loss) by Sector      Operating Income (Loss) by Sector
                                               for the Quarter Ended                for the Six Months Ended
                                         --------------------------------       ---------------------------------   
                                         June 28, 1998      June 29, 1997         June 28, 1998    June 29, 1997
                                         -------------      -------------         -------------    -------------
                                                     (Thousands)                           (Thousands)
<S>                               <C>               <C>                  <C>                 <C>
Printing and Publishing Papers             $  (592)             $(6,265)            $(2,685)        $(10,502)
Food and retail packaging                      942                2,924                 611            4,384
Converting                                    (180)               1,715                (663)           6,013
Pulp and Miscellaneous                      (3,191)                 115              (6,072)            (748)
                                           -------               ------              ------         --------
                                           $(3,021)             $(1,511)            $(8,809)        $   (853)
                                           =======              =======             =======         ========
</TABLE>

     The Company had an operating loss of $8.8 million for the six months
ended June 28, 1998 compared to an operating loss of $.9 million for the same
period in 1997.  Lower volumes in the first six months of 1998 increased the
operating loss by $7.7 million as compared to the same period in 1997.  During
the second quarter of 1998 the Company had an operating loss of $3.0 million
compared to an operating loss of $1.5 million during the second quarter of 1997.
Included in the second quarter of 1998 operating results is a $2.5 million
severance charge relating to the Company's announced work force reduction
efforts.

                                       12
<PAGE>
 
     Operating performance for printing and publishing papers improved by
$2.7 million to an operating loss of $7.8 million during the first six months of
1998 compared to an operating loss of $10.5 million for the same period in 1997.
The improved operating results were primarily due to the increase in coated
groundwood average price per ton that was partially offset by the decrease in
average price per ton for the Company's uncoated freesheet papers.  The improved
operating performance was also negatively impacted by higher costs due to the
work force reduction accrual, higher wood costs in the first quarter of 1998
from storm related supply problems, and unexpected down time in the second
quarter of 1998 at St. Francisville caused by explosions of transformers owned
by a local utility company. The operating loss decreased by $5.7 million
during the second quarter of 1998 as compared to the second quarter of 1997
primarily due to the increase in average net sales price per ton for coated
groundwood paper and the timing of the annual maintenance down at St.
Francisville that was taken during the first quarter of 1998 and the second
quarter of 1997. The improved results were partially offset by lower uncoated
freesheet prices and by higher second quarter 1998 costs, discussed above.

     Food and retail packaging operating income decreased $3.8 million to
$.6 million for the first six months of 1998 compared to the first six months of
1997.  The decrease in operating income for the six months ended June 28, 1998
compared to the same period in 1997 is primarily attributable to the decreases
in volume and average sales price per ton.  The decreases in volumes and prices
were partially offset by favorable cost variances primarily from improved mill
efficiencies and certain cost improvement initiatives.  Operating income
decreased $2.0 million during the second quarter of 1998 as compared to the
second quarter of 1997 for the reasons discussed above.

     Operating results for converting papers decreased $6.7 million in the
first six months of 1998 as compared to the first six months of 1997.  Operating
results decreased $1.9 million during the second quarter of 1998 compared to the
second quarter of 1997.  The decrease in operating results is primarily
attributable to the decrease in tons sold and the lower average price per ton
discussed previously.

     Operating losses within the Company's pulp and miscellaneous sector for the
first six months and second quarter of 1998 were $6.1 million and $3.2 million,
respectively.  The decline in operating results of $5.3 million and $3.3 million
as compared to the first six months and second quarter of 1997, respectively,
was primarily the result of higher wood costs due to ice storms in the early
months of 1998, certain manufacturing difficulties encountered during the second
quarter of 1998, and the reversal of an incentive accrual in the second quarter
of 1997.

     Selling and administrative expenses increased $1.0 million for the
first six months of 1998 compared to the same period in 1997.  The increase is
primarily due to higher sales and marketing costs during the first six months of
1998 as compared to the first six months of 1997.  Selling and administrative
expenses increased $2.7 million when comparing the second quarters of 1998 and
1997 primarily due to the reversal of an incentive compensation accrual in the
second quarter of 1997.

INTEREST EXPENSE
----------------

     Interest expense for the six months ended June 28, 1998 and June 29,
1997 was $24.5 million and $25.0 million, respectively.  Interest expense for
the second quarter of 1998 and 1997 was $12.3 million and $12.6 million,
respectively.

                                       13
<PAGE>
 
LIQUIDITY AND SOURCES OF CAPITAL
--------------------------------

     In connection with the Spin-Off, the Company obtained $250 million in
financing through a public offering of Senior Subordinated Notes and $253
million initial borrowings under a $350 million credit facility from a group of
banks (collectively, the "Financing").  The net proceeds from the Financing were
paid to James River Corporation of Virginia, now known as Fort James Corporation
("Fort James"), together with $100 million Senior Pay-in-Kind Notes issued by
the Parent as a return of James River's capital investment.

     On March 18, 1998, Crown Vantage and the Company entered into an agreement
with Fort James related to Crown Vantage's 11.45% Senior Pay-in-Kind Notes ("PIK
Notes") which are held by Fort James.  The agreement provides for the delivery
to Crown Vantage and Crown Paper Co. of PIK Notes totaling $25 million and $8
million, respectively, in exchange for the mutual release from a variety of
claims that have arisen from prior transactions between Fort James and Crown
Vantage.  In addition, Crown Vantage was granted an option to purchase the
remaining PIK Notes and accrued interest (the notes having a face amount
totaling $100 million at June 28, 1998) for a fixed price of $80 million in
cash.  The option must be exercised by September 30, 1998 and funding of the
purchase price must occur on or before October 31, 1998.  Pursuant to the
agreement, funds would be obtained through an equity offering, asset sales, or a
combination thereof. Delivery of the $33 million in PIK Notes and potentially
the funding of the option are subject to consent by the Company's bondholders
and bank group.  There is no assurance that the Company will be successful in
raising the required funding in time to exercise the option (see "Subsequent
Events").

     Under the bank credit facility the revolving credit available is in the
aggregate amount of $150 million with a $75 million sublimit for letters of
credit and can be used for general corporate purposes, working capital needs and
permitted investments.  At June 28, 1998, $60.0 million of the revolving credit
was outstanding, $39.8 million of the sublimit for letters of credit had been
used and $50.2 million of the aggregate line was available if needed.

     Cash flows provided by operating activities were $4.1 million for the
six months ended June 28, 1998 compared to cash flows provided by operating
activities of $25.8 million for the six months ended June 29, 1997.  The
decrease in operating cash flows for the six months ended June 28, 1998 compared
to the same period in 1997 is mainly attributable to the $6.0 million increase
in net loss, a $5 million reduction in the accounts receivable securitization
and fluctuations in working capital and other assets and liabilities.  Earnings
before interest, taxes, depreciation and amortization (EBITDA) were $34.3
million for the first six months of 1998 as compared to $41.8 million for the
comparable period in 1997.

     The Company's business is capital intensive.  Pulp and paper mills
generally consist of an extensive network of buildings, machinery, and
equipment, which require continual upgrades, replacement, modernization and
improvement.  The Company's capital expenditures for the six months ended June
28, 1998 were $20.4 million compared to $30.5 million in the same period in
1997.  1998 expenditures primarily represented capital maintenance projects.
Capital expenditure projects during the first six months of 1997 related to
capital maintenance projects and $7.9 million for cash payments on the Company's
rebuild of the Number 1 paper machine at the St. Francisville mill.  The
Company's capital spending plan for the remainder of 1998 is approximately $20
million.  These capital expenditures are primarily for capital maintenance and
environmental projects and are expected to be financed by cash flows from
operations and available financing sources.

WORK FORCE REDUCTION
--------------------
 
     During the second quarter of 1998 the Company accrued $2.5 million relating
to the announced work force reduction of 5%.  The accrual is for anticipated
expenses resulting from the work force reduction primarily for severance and
benefit payments to the approximately 180 affected employees.  Employment

                                       14
<PAGE>
 
classes affected include both hourly and salaried employees from manufacturing,
maintenance and office staff.  As of June 28, 1998 approximately $200,000
had been paid and the remainder will be paid during the second half of 1998 and
into early 1999.

YEAR 2000
---------

     The Year 2000 issue, common to most business information and other computer
systems, concerns the inability of information systems, primarily computer
software programs, to properly recognize and process date-sensitive information
as the year 2000 approaches and beyond.  The Company has modified or replaced
most of its key financial systems, completed the investigation of all other
systems during the second quarter of 1998 and is examining the potential impact
to the Company from significant vendors and outside service providers.  The
Company believes it will be able to modify or replace the remainder of its
affected systems in time to minimize any material detrimental effects on results
of operations.  While it is not possible at present to predict with certainty
the cost of this work, based on management's current estimates, the Company
believes that such costs will range between $2 million and $3 million, most of
which will be incurred in 1998.  As of June 28, 1998 the Company has incurred
costs of approximately $.5 million towards this effort.

NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------

     In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS No. 131") "Disclosure about
Segments of an Enterprise and Related Information."  This statement will require
segment disclosure based on management's decision-making criteria.  SFAS No. 131
also requires disclosures about the products and services provided, the
countries in which material assets are held and material revenues are generated,
and significant customers.  SFAS No. 131 is effective for the Company's 1998
fiscal year end.  Management is currently evaluating what the Company's segment
disclosures will be under SFAS No. 131.

SUBSEQUENT EVENTS
----------------- 

     On July 28, 1998, the Company announced that it is no longer actively
exploring separating its specialty papers businesses from the Company's St.
Francisville, La., pulp and paper mill. As the Company previously reported on
May 5, 1998, it was considering such a transaction, including the possible
divestiture of the St. Francisville facility, as part of in a transaction to
significantly reduce The Company's debt including the repurchase of the Parent's
PIK Notes. The Company will continue to actively explore various alternatives to
fund the repurchase of the Parent's PIK Notes. There is no assurance that the
Company will be successful in structuring a transaction of the type described,
that the Company will locate a third party or parties willing to engage in such
a transaction, that the repurchase of the Parent's PIK Notes will be realized or
that the Company will successfully and in a timely manner conclude any such
transaction.

FORWARD LOOKING STATEMENTS
--------------------------

     Certain statements within Management's Discussion and Analysis and
elsewhere are forward looking statements within the meaning of the Private
Securities Litigation Reform At of 1995. These statements are subject to
various risks and uncertainties that could cause the actual results to be
materially different from the Company's current expectations. These forward-
looking statements can be identified by use of language such as plans,
estimates, anticipates, believes, possible and other similar words or phrases.
In addition to the factors discussed above, there are other factors that could
cause the actual results to differ materially. These other factors include but
are not limited to business conditions and the general economy, competitive
factors, maintaining good labor relations, and maintaining good customer
relations.

                                       15
<PAGE>
 
 ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
 ------                                    

 (a)   Exhibits


       Ex. 10.1      Form of Agreement - Deferred Stock Awards for Selected
                     Salaried Employees *
       Ex. 10.2      Form of Agreement - Deferred Stock Awards for Senior
                     Officers *
       Ex. 10.3      Description of Temporary Enhanced Severance *
       Ex. 27        Financial Data Schedule *
----------
       *   Electronic filing only 

(b)    Reports on Form 8-K --

       Current Report, previously filed on Form 8-K dated July 28, 1998, item 5,
       relating to the Company no longer actively exploring the possible
       separation of its specialty papers businesses from the St. Francisville
       facility and its exploring other alternatives to repurchase the Parent's
       PIK Notes.

                                       16
<PAGE>
 
SIGNATURES

          Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

CROWN PAPER CO.
(Registrant)



/s/ R. NEIL STUART                    /S/ MICHAEL J. HUNTER
----------------------                ---------------------------
R. Neil Stuart                        Michael J. Hunter
Senior Vice President,                Vice President,
Chief Financial Officer               Chief Accounting Officer
(Duly Authorized Officer)             (Duly Authorized
                                      Chief Accounting Officer)

August 12, 1998

                                       17