SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                   ----------

                                    FORM 10-K

  [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                                   ACT OF 1934

                     For fiscal year ended December 31, 1998

                             Commission File Number:

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


                                    Delaware
                 (State or other jurisdiction of incorporation)

                                   34-1535916
                      (I.R.S. Employer Identification No.)

                    2351 Whirlpool Street, Niagara Falls, NY
                                   14305-2413
                    (Address of principal executive offices)
                                   (Zip Code)
                    Registrant's telephone number, including
                            area code: (716) 278-3800

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

                    SECURITIES REGISTERED PURSUANT TO SECTION
                                12(g) OF THE ACT:

                           10.5% Senior Notes Due 2003


                    SECURITIES REGISTERED PURSUANT TO SECTION
                             12(b) OF THE ACT: NONE

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

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

Documents Incorporated By Reference: None.


<PAGE>


                                     PART I

ITEM 1.       BUSINESS

         Unifrax   Corporation   ("Unifrax"  or  "Company")   manufactures  heat
resistant  ceramic fiber  products for  automotive,  commercial,  and industrial
customers  primarily  throughout  North  America.  Manufacturing  facilities are
located in Western New York and Indiana.

Prior to  February  29,  1996,  Unifrax  was  known as The  Carborundum  Company
("Carborundum")  and included a number of divisions and subsidiaries  engaged in
various manufacturing  businesses.  On February 29, 1996, all of the Carborundum
businesses  except for  Unifrax  were sold to Societe  Europeenne  des  Produits
Refractaires  and various  other units of Compagnie  de Saint  Gobain  ("SEPR").
Concurrent with the  Saint-Gobain  Sale,  Carborundum was re-named  Unifrax.  In
connection with this sale, The British Petroleum Company p.l.c.  ("BP") and SEPR
entered into  various  agreements  regarding  the ongoing  relationship  between
Unifrax and SEPR subsequent to the closing of the transaction.  These agreements
expire  March 1, 2001,  with certain  exceptions.  The Company must provide SEPR
with certain specified  technical services and product information for which, in
certain circumstances, the Company will receive a royalty.

         Developed  by the  Company in 1942,  ceramic  fiber is a white,  glassy
material  belonging to a class of materials known as man-made vitreous fibers (a
class which also includes fiberglass and mineral wool).  Ceramic fiber possesses
several commercially  attractive  performance  properties including stability at
very high  temperatures,  extremely low heat  transmission and retention,  light
weight  compared  to other  heat-resistant  materials,  chemical  stability  and
corrosion resistance.  These properties make ceramic fiber a superior insulating
material in high temperature applications.

         Ceramic  fiber's most common  application  has been to line  industrial
furnaces,  where high temperatures  demand its  heat-resistant  characteristics.
Historically,  the industrial furnace-related market has represented the largest
percentage of the  Company's  sales.  Increasingly,  the Company has applied its
expertise  to  rapidly-growing,   high  value-added  niche  markets,   including
automotive, power generation, and fire protection.

MARKETS

          Furnace-Related    Markets.    Ceramic   fiber   for   furnace-related
applications  is  generally  sold to the metal  production,  petrochemical,  and
ceramic and glass industries.

          Automotive  Market.  Three product types account for substantially all
of the  fiber  consumed  by  the  automotive  industry:  paper,  XPE(TM)  gasket
material, and insulation heat shields.

         Other   Markets.   Ceramic   fiber  is  being  used  in  several  newer
applications in niche markets such as power  generation,  fire  protection,  and
commercial  insulation.  In these  industries,  products are often customized to
meet special customer needs.

MANUFACTURING AND OPERATIONS

         Ceramic fiber is produced by melting a combination of alumina,  silica,
and other  additives  in either a  submerged  electrode  furnace  (SEF) or in an
electric arc furnace. The molten mixture is made into fiber either by blowing an
air stream on the molten material flowing from the furnace (blowing  process) or
by directing  the molten  material  onto a series of spinning  wheels  (spinning
process).  The blowing  and  spinning  processes  produce  fiber with  different
characteristics, dimensions, and process yields.

         The Company also employs advanced  manufacturing  processes  associated
with the "wet"  manufacture  of papers and felts,  boards,  and other  products.
These  processes  use bulk  ceramic  fiber as a feedstock  in  combination  with
binders or other liquids.

         The Company's  operations in Tonawanda,  New York, in early 1997 became
certified under the International  Quality Standard,  ISO 9000, and the rigorous
U.S. automotive standard,  QS 9000. During 1998, the Company's operations in New
Carlisle, Indiana and in Amherst, New York also became certified under ISO 9000.

         In late 1997 the Company successfully brought into service its expanded
furnacing capability at its New Carlisle,  Indiana,  facility. At a cost of over
$14  million,  this  project  was  undertaken  as a  strategic  move to meet the
anticipated growing demand for ceramic fiber products.

RAW MATERIALS

         Although  the Company  purchases  some of its raw  materials  from sole
suppliers,  substitute  materials are available from other  suppliers on similar
terms.  Supplier  changes  would  require  some  level of  product  and  process
qualification,  but there are no technical barriers identified. The exception is
vermiculite,  a mineral which is an important raw material in the manufacture of
XPE(TM) which is used in automotive  catalytic  converter  gaskets.  The Company
currently  purchases the majority of its  requirements  of  vermiculite  from an
overseas source and the balance from a U.S. supplier.  Because  vermiculite from
the overseas source has superior  performance  qualities,  the Company  believes
that over the next two to three years, both it and its competitors will continue
to rely on the overseas source.

RESEARCH AND DEVELOPMENT

         The  research  and   development   group,   located  at  the  Company's
headquarters,  operates in a 9,500 square foot laboratory,  including facilities
for pilot plant development and traditional research and development activities.

         The  Company  has  maintained  a  strong  financial  commitment  to its
research and development  program.  Research and development expense constituted
approximately  3.1%  and 3.2% of net  sales  during  the  years  1997 and  1998,
respectively.

COMPETITION

         The  ceramic  fiber  industry  is highly  competitive,  and some of the
Company's competitors are larger and have greater resources than the Company. In
the furnace-related markets,  competition is based primarily on product quality,
price, and service.  In the new high growth niche markets,  competition is based
primarily on product technology, technical specifications, manufacturing process
capabilities, quality assurance and price.

         The Company has significant  competitors in its markets,  some of which
manufacture ceramic fiber while others purchase ceramic fiber and then reprocess
it  into  products   which  compete  with  the   Company's   products.   In  the
furnace-related markets, the Company's competitors are Morgan Crucible's Thermal
Ceramics business unit,  American Premier  Refractories and Chemicals,  and A.P.
Green. In the automotive market, the Company's  significant  competitors include
Thermal  Ceramics,  Minnesota Mining & Manufacturing  Company ("3M") and Lydall.
Both Lydall and 3M are reprocessors of ceramic fiber.

         The Company's  significant  competitors  in its other  markets  include
Lydall and Thermal  Ceramics.  In some instances,  ceramic fiber competes with a
limited number of non-ceramic fiber products such as hard brick refractories and
mineral wool.

CYCLICALITY AND SEASONALITY

         The  Company's  products are generally  used in  industries  subject to
supply and demand cycles which reflect general economic  activity.  In addition,
certain markets  historically have been slightly seasonal,  with higher sales in
the second and fourth quarters and lower sales in the first and third quarters.

BACKLOG

         The Company does not consider its backlog  significant because it fills
most of its orders within one month and  substantially  all of its orders within
three months.

PRODUCT AND HEALTH SAFETY ISSUES

         Manufacturers of man-made  vitreous fibers ("MMVF") such as fiberglass,
mineral  wool and ceramic  fiber have  investigated  the  potential  for adverse
health effects  associated  with the inhalation of airborne  fiber.  Independent
animal  studies have  indicated  that ceramic fiber inhaled by test animals,  in
large quantities during the course of their lifetimes,  can cause fibrosis, lung
cancer and mesothelioma,  a malignant tumor of the lining of the lungs and chest
cavity.  Company and  industry-sponsored  studies of workers  with  occupational
exposure to airborne  ceramic fiber,  however,  to date have found no clinically
significant  relationship between ceramic fiber exposure and respiratory disease
in humans.

         The Company has established organization and management systems for the
purpose of ensuring  that health and safety  matters  are  properly  identified,
evaluated  and  addressed  throughout  the  Company's  operations.  The  Company
utilizes  the   knowledge,   skills  and  expertise  of  a  number  of  external
consultants,   including  an  independent   advisory  board.   Comprised  of  an
internationally recognized group of experts in the fields of medicine, pulmonary
science, veterinary pathology, toxicology and legislative,  regulatory and legal
affairs,  the Ceramic  Fiber  Advisory  Board  ("CFAB")  provides  advice to the
Company regarding proper handling  practices for ceramic fiber and other related
product management issues.

         The  Company   developed  and  implemented  a   comprehensive   Product
Stewardship  Program ("PSP") as one of its management  systems. A key element of
the PSP is research  focused on identifying and evaluating the potential  health
effects associated with the inhalation of respirable fibers.  These studies have
taken two forms:  human studies,  known as epidemiological  investigations,  and
toxicological research,  which is generally conducted with test animals. Many of
these research  activities have been conducted with the  participation  of other
members of the ceramic fiber industry.

         The Company's PSP also includes  elements  designed to identify exposed
populations,  monitor  employee  and  customer  exposures  and  pursue  exposure
reductions.  Initial  assessments  indicate that most ceramic fiber  exposure is
confined to the workplace and to a limited  population of about 30,000  persons.
Employee  and customer  exposure  monitoring  has been  conducted by the Company
under a rigorous  protocol,  jointly  adopted  pursuant to a  voluntary  consent
agreement by the U.S. Environmental Protection Agency ("EPA") and the Refractory
Ceramic Fiber Coalition ("RCFC"),  the ceramic fiber industry trade association.
Under the terms of this agreement,  industry and customer  workplace  monitoring
samples were taken for a period of five years concluding in mid-1998.

         In the  absence  of a  specific  U.S.  government  standard  regulating
ceramic fiber  exposure,  several  years ago the industry  adopted a recommended
exposure guideline ("REG") of one fiber per cubic centimeter of air.  Scientific
data  available  to date has been  regarded as  insufficient  for the purpose of
defining a specific  exposure  threshold of acceptably low risk for humans.  The
industry's voluntary exposure guideline provides a quantitative basis to measure
progress in implementing  PSP objectives to seek  continuous  reduction in fiber
exposure through  initiatives  that are technically and  economically  feasible.
During  1997  several  participants  in the  industry,  including  the  Company,
voluntarily  reduced  the REG from one fiber per cubic  centimeter  to  one-half
fiber per cubic centimeter based on prudence and not significant risk.

         Over time, health research data have been used by various organizations
to classify certain man-made fibers. For example,  classification terms, such as
"possible"  (International  Agency for Research on Cancer,  "IARC"),  "probable"
(EPA and Health Canada,  "HC"),  "reasonably  anticipated"  (National Toxicology
Program,  "NTP"),  and  "suspected"  (proposed  by the  American  Conference  of
Governmental   Industrial   Hygienists,   "ACGIH")  reflect  the  view  of  each
organization as to the potential  carcinogenicity  of ceramic fiber and/or other
MMVFs.  Each of these  classifications  reflect  concern  for human  health  and
uncertainty  regarding  the  potential  for  airborne  ceramic  fiber to  affect
occupational health adversely. These classification determinations have not been
followed by exposure standards in the U.S., although the ACGIH recently proposed
exposure standards for public comment.

         Some regulators in other countries have adopted a variety of regulatory
thresholds. Member States of the European Union voted in November 1997, under DG
XI, to  classify  ceramic  fiber as  "Category  2:  Substances  which  should be
regarded  as if they are  carcinogenic  to man" on the basis of animal  studies,
although  refractory  ceramic fiber  exposure has not been  associated  with any
respiratory  disease  in  humans.  If the  U.S.  were to  adopt  legislative  or
regulatory  standards severely  restricting the use of ceramic fiber or severely
limiting fiber  exposure,  a material  adverse effect on the Company's  business
could result.

ENVIRONMENTAL REGULATION

         The Company's  operations  and properties are subject to a wide variety
of  foreign,  federal,  state and local laws and  regulations,  including  those
governing the use, storage, handling, generation,  treatment, emission, release,
discharge  and  disposal  of  certain  materials,  substances  and  wastes,  the
remediation of contamination  in the  environment,  and the health and safety of
employees and other  persons.  As such,  the nature of the Company's  operations
exposes it to the risk of claims with respect to  environmental  protection  and
health and safety matters,  and there can be no assurance that material costs or
liabilities  will not be incurred in connection  with such claims.  Reference is
made  to the  information  included  in Note  14 to the  consolidated  financial
statements  included in this Form 10-K, and to information  appearing  under the
headings "Health and Safety Indemnity" and  "Environmental  Indemnity"  provided
under  Item 13 of this  Form  10-K,  which  are  hereby  incorporated  herein by
reference.

PATENTS AND TRADEMARKS

         Although the Company  obtains  patent  protection  for certain  product
innovations,  the Company  believes that its success depends more heavily on the
technical expertise and innovative abilities of its personnel than on its patent
protection.  The Company  believes  its  trademarks  are  important  in order to
develop and support brand image and to  differentiate  itself from  competitors.
Some of the Company's technology and trademarks have been licensed to SEPR.

EMPLOYEES

         As of December 31, 1998, the Company employed approximately 406 persons
on a full-time  basis,  Approximately  66 employees at the  Company's  Tonawanda
plant are members of the Oil, Chemical and Atomic Workers union.
<PAGE>

ITEM 2.       PROPERTIES

         The flagship of the  Company's  operations  is located in New Carlisle,
Indiana. This facility is believed to be the largest ceramic fiber manufacturing
plant in the world,  producing  blown and spun forms of bulk fiber and blankets.
The  Company  also  operates  three  manufacturing  plants in  Niagara  and Erie
Counties in Western New York.

         The Company's  headquarters is located in Niagara Falls, New York. This
site  houses  salaried  and  hourly  support  and  management  staff  as well as
application  engineers  and  other  professionals   dedicated  to  research  and
development of new products and applications for ceramic fiber.

         The following  table provides a description of the Company's  principal
facilities.

<TABLE>
<CAPTION>

                         Approximate
Plant Site               Square Feet        Status          Use
----------               -----------        ------          ----
<S>                      <C>                 <C>        <C>

New Carlisle, IN         230,000             Owned      Bulk ceramic fiber, blankets, modules, boards

Tonawanda, NY            144,000             Leased     Papers, felts, boards, XPE(TM), porosity-controlled paper

Amherst, NY               42,000             Leased     Woven and spun textiles

Sanborn, NY               10,000             Leased     Fibermax(R) high temperature fiber

Niagara Falls, NY         33,000             Owned      Headquarters, research laboratory
</TABLE>


ITEM 3.       LEGAL PROCEEDINGS

         Reference  is  made  to the  information  included  in  Note  14 to the
consolidated  financial  statements of the Company included under Item 8 in this
Form 10-K, which is hereby incorporated herein by reference.

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

         None.

<PAGE>


                                     PART II


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

         There is no established public trading market for the Company's stock.

ITEM 6.  SELECTED FINANCIAL DATA

         The following  table should be read in conjunction  with  "Management's
Discussion and Analysis of Financial  Condition and Results of  Operations"  and
with the Company's consolidated financial statements and related notes in Item 8
of this Form 10-K.

<TABLE>
<CAPTION>
         
                                                                   Year Ended December 31,
                                              1994            1995            1996          1997           1998
                                              ----            ----            ----          ----           ----
                                                                 (Dollars in Thousands)
<S>                                        <C>              <C>             <C>           <C>            
                                                                   
STATEMENT OF INCOME DATA:
Net sales                                  $76,246          $84,064         $91,631       $87,111        $85,499
Income before interest and income taxes     17,708           21,448          22,429        20,039         18,338
Interest expense                                 -                -           2,246        12,537         11,988
Provision for income taxes                   7,256            8,743           8,543         1,937          2,305
                                           -------          -------         -------       -------        -------
Net income                                 $10,452          $12,705         $11,640       $ 5,565        $ 4,045
                                           =======          =======         =======       =======        =======

OTHER DATA:
EBITDA(a)                                  $21,928          $25,749         $26,520       $25,362        $23,987
Depreciation and amortization                4,220            4,301           4,091         5,323          5,649
Cash Flows From Operating Activities        11,324           18,925          18,631        13,987          9,243
Cash Flows From Investing Activities        (2,578)          (3,593)         (8,579)       (9,276)        (3,759)
Cash Flows From Financing Activities        (8,743)         (15,393)         (9,191)       (5,250)        (5,800)

BALANCE SHEET DATA (AT PERIOD
     END):
Working capital                           $ 16,688         $ 14,763        $ 14,022      $ 12,921       $  4,858
Long Term Debt                                  --               --         127,750       122,500        105,950
Total assets  56,897                        54,239           93,391          90,462        88,654
Total liabilities                           18,943           18,815         147,455       136,641        130,778
Parent company investment(b)                37,954           35,424              --            --             --
Stockholders' Deficit(b)                        --               --         (54,064)      (46,179)       (42,124)

</TABLE>

(a)       "EBITDA"  means  earnings from  operations  before  interest  expense,
          taxes,  depreciation,  and  amortization.  EBITDA is included  because
          management believes that it is an indicator used by investors to gauge
          a company's ability to service its interest and principal obligations.
          EBITDA  should not be  considered  in isolation  from, as a substitute
          for,  or as being more  meaningful  than net  income,  cash flows from
          operating,  investing and financing activities or other income or cash
          flow  statement data prepared in accordance  with  generally  accepted
          accounting  principles and should not be construed as an indication of
          the  Company's  operating  performance  or as a measure of  liquidity.
          EBITDA,  as presented herein,  may be calculated  differently by other
          companies  and, as such,  EBITDA amounts  presented  herein may not be
          comparable to other similarly titled measures of other companies.

(b)       Prior  to  consummation  of  the  Recapitalization,  the  Company  was
          accounted  for  as  a  division  of  Carborundum   rather  than  as  a
          subsidiary,  and had no separately  identifiable  equity other than an
          amount  equal  to  its  net  assets   captioned  as  "parent   company
          investment." In connection with the Recapitalization,  this investment
          was eliminated and replaced by stockholders' deficit.

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

FORWARD LOOKING STATEMENTS

Statements  included in this  Management  Discussion  and  Analysis of Financial
Condition and Results of  Operations  and elsewhere in this document that do not
relate to present or  historical  conditions  are "forward  looking  statements"
within the meaning of that term in Section 27A of the Securities Act of 1933, as
amended,  and of Section 21F of the Securities Exchange Act of 1934, as amended.
Forward looking statements include,  without limitation,  any statement that may
predict,   forecast,   indicate  or  imply  future   results,   performance   or
achievements,  and may  contain  the words  "believe,"  "anticipate,"  "expect,"
"estimate,"  "project,"  "will  continue," "will result," or words or phrases of
similar  meaning.  Additional oral or written forward looking  statements may be
made by the Company from time to time,  and such  statements  may be included in
documents  filed with the  Securities  and  Exchange  Commission.  Such  forward
looking statements involve risks and uncertainties  which could cause results or
outcomes to differ  materially  from those  expressed  in such  forward  looking
statements.  Among the important  factors on which such statements are based are
assumptions  concerning the  continuing  strength of the ceramic fiber market on
which the Company is substantially dependent,  changing prices for ceramic fiber
products,  acceptance  of new  products,  the status of health and safety issues
affecting the ceramic fiber  industry in general and the Company in  particular,
the Company's  continuing  ability to operate under the restrictions  imposed by
the substantial  indebtedness  which it is subject to, the risks associated with
international  operations,  the  impact  of  environmental  regulations  on  the
Company's operations and property and related governmental regulations,  and the
continuing availability of certain raw materials, including vermiculite which is
purchased from an overseas source.

GENERAL

         The  following  section  should be read in  conjunction  with the other
information set forth in this document,  including the financial  statements and
the notes thereto.

<PAGE>



RESULTS OF OPERATIONS

                                                 Year Ended December 31,
                                          1996          1997          1998
                                          ----          ----          ----

Net sales                                 100.0%       100.0%        100.0%
Cost of goods sold                         50.9         50.7          51.2
                                          -----        -----         -----
Gross profit                               49.1         49.3          48.8
Selling, general and administrative        21.9         23.2          24.1
Allocated corporate charges                 0.4          -             -
Research & development                      2.5          3.1           3.2
                                          -----        -----         -----
Operating income                           24.3%        23.0%         21.5%

YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997

     Net sales  decreased  $1.6  million or 1.9% from  $87.1  million in 1997 to
$85.5 million in 1998.  Several  Unifrax  markets for ceramic  fiber,  including
petrochemicals,   steel  and  power  generation,   weakened  during  1998  as  a
consequence   of   global   economic    pressures   and    uncertainty.    Also,
porosity-controlled  products  continued to be affected by  automotive  industry
airbag design changes toward systems using less filtration.

     Gross profit declined by $1.3 million,  or 2.8%, from $43.0 million in 1997
to $41.7 million in 1998.  Gross profit as a percentage  of net sales  decreased
slightly  from 49.3% in 1997 to 48.8% in 1998.  The decline in gross  profit was
due to the lower sales volume and downward  pressure on prices in the automotive
market and in some traditional markets.

     Selling,  general and administrative  expenses increased by $0.4 million or
1.9%,  from  $20.2  million  in 1997 to $20.6  million  in 1998 as a  result  of
inflation,  offset partially by the effects of the lower sales volume.  Selling,
general and administrative  expenses as a percentage of net sales increased from
23.2% in 1997 to 24.1% in 1998.

     Research and  development  expenses  increased by $0.1 million or 1.3% from
$2.7  million in 1997 to $2.8  million in 1998.  The higher  expense  was due to
additional testing and development  expenditures for new products.  Research and
development  expenses as a percentage of net sales were 3.1% in 1997 and 3.2% in
1998.

     Operating income decreased by $1.6 million,  or 8.2%, from $20.0 million in
1997 to $18.4  million in 1998.  Operating  income as a percentage  of net sales
decreased  from  23.0%  in 1997 to 21.5% in  1998,  as a result  of the  factors
previously indicated.

     Interest expense decreased by $0.6 million,  or 5.1%, from $12.5 million in
1997 to $11.9  million in 1998 as a result of the  repurchase of $2.0 million of
10.5% Senior Notes,  voluntary  prepayment of principal on the term loan,  lower
interest rates on borrowings,  and conversion of the amount due affiliates  into
preferred  stock of the Company.  Interest  expense as a percentage of net sales
decreased from 14.4% in 1997 to 13.9% in 1998.

     Provision  for income taxes  increased  $0.4 million,  or 20.7%,  from $1.9
million in 1997 to $2.3 million in 1998. The effective income tax rate increased
from 25.8% in 1997 to 36.3% in 1998. The effective  income tax rate for 1997 was
less than that which would be expected due to the recognition of $1.0 million of
deferred tax assets  resulting from the  Recapitalization  which were,  prior to
1997, unrecognized.

     Net income decreased by $1.6 million,  or 27.3%,  from $5.6 million in 1997
to $4.0 million in 1998, as a  result  of  factors  previously  indicated.  Net
income as a percentage of net sales decreased from 6.4% in 1997 to 4.7% in 1998,
as a result of the factors discussed above.

     EBITDA  decreased by $1.4 million,  or 5.4%,  from $25.4 million in 1997 to
$24.0  million in 1998.  The decrease in EBITDA is  attributable  to the factors
affecting  operating income which were discussed  above,  offset partially by an
increase in  depreciation  and  amortization  from $5.3  million in 1997 to $5.7
million in 1998,  resulting from the capacity expansion in New Carlisle.  EBITDA
as a percent of net sales decreased from 29.1% in 1997 to 28.1% in 1998.

     Capital Expenditures decreased $5.6 million, or 59.4%, from $9.4 million in
1997 to $3.8 million in 1998,  due primarily to the completion of the investment
in capacity  expansion in New Carlisle.  Capital  expenditures  in 1998 included
projects to replace worn equipment,  to reduce costs and to increase capacity in
certain processes.  Working capital decreased from $12.9 million in 1997 to $4.9
million in 1998.  Increased  levels of raw materials and in-process  inventories
were offset by the  reclassification  of the note  payable--affiliate  from long
term to current  liabilities,  and also the current portion of long term debt to
current liabilities.

     Cash flows from operating activities decreased $4.8 million, or 33.9%, from
$14.0 million in 1997 to $9.2 million in 1998 as a consequence  of the lower net
income and inventory  change  discussed  above.  Cash  outflows  from  investing
activities  decreased  $5.5 million from $9.3 million in 1997 to $3.8 million in
1998  due to  decreased  capital  expenditures.  Cash  outflows  from  financing
activities  increased  $0.5 million from $5.3 million in 1997 to $5.8 million in
1998.

YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996

     Net sales  decreased  $4.5  million or 4.9% from  $91.6  million in 1996 to
$87.1 million in 1997. Strong demand for bulk fibers to the automotive,  metals,
and  specialties  sectors and growth in specialty  products for fire  protection
were  offset by lower  sales in some  traditional  blanket  applications  and in
porosity-controlled   products.  Sales  of  porosity  controlled  products  were
affected by the controversy during 1997 regarding airbag safety,  which resulted
in announcements  of design changes.  Also, to reduce end-user cost, the Company
changed the product form being sold to certain customers.

     Gross profit declined by $2.0 million,  or 4.5%, from $45.0 million in 1996
to $43.0 million in 1997.  Gross profit as a percentage  of net sales  increased
slightly  from 49.1% in 1996 to 49.3% in 1997.  The decline in gross  profit was
due to the lower sales volume and downward  pressure on prices in the automotive
market and on some of the larger projects in traditional markets.

     Selling,  general and administrative  expenses increased by $0.2 million or
1.1%,  from  $20.0  million  in 1996 to $20.2  million  in 1997 as a  result  of
inflation,  offset partially by the effects of the lower sales volume.  Selling,
general and administrative  expenses as a percentage of net sales increased from
21.8% in 1996 to 23.2% in 1997.

     Allocated  corporate  charges  decreased  by $0.3 million or 100% from $0.3
million in 1996 to $0 in 1997, due to the elimination of the allocated corporate
charges.  Allocated  corporate  charges were  recognized  for only two months of
1996, as the Saint-Gobain Sale was completed on February 29, 1996. Subsequent to
the Sale,  the Company began  purchasing  services on an arm's length basis from
unrelated third parties, or providing the services internally.  The arm's length
purchases  of  services  are  included in  selling,  general and  administrative
expenses.

     Research and development  expenses  increased by $0.4 million or 18.6% from
$2.3  million in 1996 to $2.7 million in 1997.  The higher  expense was due to a
planned  increase  in  testing  and  development   expenditures  for  automotive
products,  and for the  development  of new  fibers.  Research  and  development
expenses as a percentage of net sales were 2.5% in 1996 and 3.1% in 1997.

     Operating income decreased by $2.3 million, or 10.4%, from $22.3 million in
1996 to $20.0  million in 1997.  Operating  income as a percentage  of net sales
decreased  from  24.4%  in 1996 to 23.0% in  1997,  as a result  of the  factors
previously indicated.

     Interest expense increased by $10.3 million,  or 458.2%,  from $2.2 million
in 1996 to $12.5 million in 1997 as a result of  borrowings  in connection  with
the  Recapitalization,  which  occurred in October 1996.  Interest  expense as a
percentage of net sales increased from 2.5% in 1996 to 14.4% in 1997.

     Provision  for income taxes  decreased  $6.6 million,  or 77.6%,  from $8.5
million in 1996 to $1.9 million in 1997. The effective income tax rate decreased
from 42.3% in 1996 to 25.8% in 1997,  due to the  recognition of $1.0 million of
deferred tax assets  resulting from the  Recapitalization  which were previously
unrecognized.

     Net income decreased by $6.0 million,  or 51.7%, from $11.6 million in 1996
to $5.6 million in 1997, as a result of factors previously indicated. Net income
as a percentage of net sales  decreased from 12.7% in 1996 to 6.4% in 1997, as a
result of the factors discussed above.

     EBITDA  decreased by $1.1 million,  or 4.4%,  from $26.5 million in 1996 to
$25.4  million in 1997.  The decrease in EBITDA is  attributable  to the factors
affecting  operating income which were discussed  above,  offset partially by an
increase in  depreciation  and  amortization  from $4.1  million in 1996 to $5.3
million in 1997,  resulting  from the  capacity  expansion in New Carlisle and a
full year of  amortization  of  deferred  financing  costs  associated  with the
Recapitalization.  EBITDA as a percent of net sales increased from 28.9% in 1996
to 29.1% in 1997.

     Capital Expenditures increased $1.1 million, or 14.0%, from $8.3 million in
1996 to $9.4  million  in 1997,  due to the  timing of  investment  in  capacity
expansion in New Carlisle.  Capital  expenditures  included  projects to replace
worn  equipment,  to improve  efficiency,  and to add capacity.  Working capital
decreased from $14.0 million in 1996 to $12.9 million in 1997. Lower receivables
and  inventories  were  offset by the effect of lower  payables,  lower  accrued
expenses, and the conversion of the advance from affiliates to preferred stock.

     Cash flows from operating activities decreased $4.6 million, or 24.9%, from
$18.6 million in 1996 to $14.0 million in 1997 as a consequence of the lower net
income discussed above. Cash outflows from investing  activities  increased $0.7
million  from $8.6  million  in 1996 to $9.3  million  in 1997 due to  increased
capital  expenditures.  Cash outflows from financing  activities  decreased $3.9
million from $9.2 million in 1996 to $5.3 million in 1997 as there was no repeat
during 1997 of the outflows associated with the Recapitalization.

LIQUIDITY AND CAPITAL RESOURCES

         In conjunction with the  Recapitalization  and sale to Unifrax Holding,
the Company  entered into a Credit  Agreement  pursuant to which the Company has
available to it a $25.0 million term loan and a $20.0 million  revolving  credit
facility.  The revolving  credit  facility is available for working  capital and
other corporate  purposes.  Loans under the Credit  Agreement bear interest at a
rate based upon LIBOR or the lender's  prime rate plus a negotiated  margin.  In
addition,  the Company  issued to BP Exploration  (Alaska),  Inc. a subordinated
$7.0  million note  bearing  interest at prime,  with  principal  repayment  due
October,  1999. The Company also incurred $100 million of long term indebtedness
in the form of an  indenture  for senior notes at 10.5% per annum as part of the
Recapitalization  and sale. Both the indenture and the Credit Agreement  contain
certain  restrictive  covenants  including  requirements  that the Company  meet
certain  financial  ratio tests and limitations on the ability of the Company to
incur  additional  indebtedness.  At  December  31,  1998,  the  Company  was in
compliance with all Credit Agreement and Indenture covenants.

         During  1998  the  Company  made  voluntary  prepayments  of  principal
totaling $3.0 million on its Term Loan thereby reducing the balance  outstanding
from $13.0  million at December 31, 1997 to $10.0  million at December 31, 1998.
As of December  31, 1998 the Company  borrowed  $1.7  million  against its $20.0
million revolving credit facility.

         On August 25, 1998,  the Company  repurchased  $2 million face value of
Senior Notes.

         Management  believes that cash flows from  operations and the available
credit  facility will be sufficient  to fund  operating and capital  expenditure
needs for 1999.

         Prior  to  the  Recapitalization,  the  results  of  operations  of the
Company's U.S.  subsidiaries  were included in the consolidated  U.S.  corporate
income tax return of BP America,  Inc. ("BP America").  The Company's  provision
for income taxes was computed as if the Company  filed its annual tax returns on
a separate  company basis.  The current  portion of the income tax provision was
satisfied  by  the  Company  through  a  charge  or  credit  to  parent  company
investment.

         As of  October  30,  1996,  the  Company  entered  into  a tax  sharing
agreement  with Holding.  The results of its  operations are now included in the
consolidated  U. S.  corporate  income  tax  return of  Holding.  The  Company's
provision  for income  taxes is computed as if the Company  filed its annual tax
returns on a  separate  Company  basis.  The  current  portion of the income tax
provision will be satisfied by a payment to or from Holding.

         At December 31, 1998,  the Company had Federal and state net  operating
loss carryforwards  totaling approximately $17.4 million which will be available
to offset future taxable income.  These net operating loss carryforwards  expire
in 2011 through 2013.

LEGAL PROCEEDINGS

         Reference  is  made  to the  information  included  in  Note  14 to the
consolidated  financial  statements of the Company included under Item 8 in this
Form 10-K, which is hereby incorporated herein by reference.

IMPACT OF YEAR 2000

         Some of the Company's  older  computer  programs were written using two
digits  rather  than four to define  the  applicable  year.  As a result,  those
computer programs would recognize a date using "00" as the year 1900 rather than
the year  2000.  This  could  have  caused a system  failure  or  miscalculation
resulting  in  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 completed an assessment of its Year 2000  readiness and
believes it has identified  all  significant  areas with potential  date-related
problems.  The  Company  has  determined  which of those  identified  areas  are
critical  to  the  normal  operation  of  the  business,  and  has  developed  a
remediation  plan for  non-compliant,  critical areas.  Of those  non-compliant,
critical systems, the Company has completed and put into production  corrections
or  upgrades  to all but one  identified  system as of December  31,  1998.  The
completed  systems include all line of business  software,  support software and
networks,  with the exception of payroll.  Payroll is the final critical system,
and is being  addressed by the  outsourcing  vendor.  Conversion  to a Year 2000
compliant  version is scheduled for the second  quarter of 1999.  The Company is
working with the payroll vendors to assure that this timetable is met.

         In addition to the critical systems identified, there are other systems
or pieces of equipment  which assist in the day to day operation of the Company,
but are not vital to business operations. An action plan is in place to provide
for the Year 2000 readiness of these other items either through upgrade,  repair
or replacement.  This is a continuous process which is underway now, and will be
continuing  through  1999.  Although the Company  expects that these other items
will be Year 2000  compliant by late 1999,  the Company  does not believe  these
other items will seriously  disrupt the orderly  conduct of its business even if
not corrected or replaced within the time frame.

         It is the  Company's  current  policy to keep  much of its  operational
software, both critical and noncritical,  on maintenance contracts which provide
the most  current  versions  of the  software as a part of the  contracts.  Most
vendors have  supplied  Year 2000  compliant  software as a part of their normal
product  enhancement  and  evolution,  and these upgrades have been or are being
applied to achieve  Year 2000  readiness.  The  Company  understands  from these
software vendors that they have performed  substantial product quality assurance
testing  of their  products  prior to  general  release,  contributing  to their
assurance of their products' Year 2000 readiness.  In addition,  the Company, as
part  of  its   implementation   process,   performed   additional  testing  and
verification  of  substantially  all  software,  including  software  not  under
maintenance contracts.  Although the software has been tested to the best of the
supplier's and the Company's ability,  there is no absolute assurance that these
various software systems are indeed Year 2000 compliant.

         The total Year 2000 project cost is estimated at approximately $250,000
which includes  $100,000 for the purchase of new software or equipment that will
be  capitalized,  and $150,000  that will be expensed as  incurred.  To date the
Company has incurred  and  expensed  approximately  $125,000  primarily  for the
assessment  effort and remediation of the line of business  software.  All funds
used for Year 2000  remediation  have been treated as a part of normal operating
expenses and on-going capital budgeting.

         The costs of the project and the completion date of the remaining items
are based on  management's  best  estimates  which were derived  using  numerous
assumptions of future events,  including the continued  availability  of certain
resources  and other  factors.  However  there can be no  guarantee  that  these
estimates will be achieved and actual results could differ materially from those
anticipated.  Specific factors that might cause material differences include but
are not limited to the availability and cost of personnel  trained in this area,
the  ability to locate and  correct  all  relevant  computer  codes and  similar
uncertainties.

         The  Company's  review  of the  status  of  key  supplier's  Year  2000
readiness  leads  management  to expect that there will be no  material  adverse
impact in key  suppliers'  ability to provide the Company  with the products and
services needed for the orderly conduct of business in the year 2000 and beyond.
In addition,  the Company has not been able to identify  any  probable  indirect
material  adverse  impact on its  operations  or financial  condition  likely to
result from the effects of the Year 2000  problems  on its  vendors,  customers,
agents,  or other  third  parties,  but the  ability to assess  such  effects is
extremely limited and the failure of third parties to appropriately address Year
2000 problems could have material adverse effects on the Company.

         The  only  Year  2000  problem  that the  Company  has  identified  and
considers reasonably likely of occurrence that might materially adversely affect
the  Company's  results of  operations  or financial  condition  would be if the
Company's payroll vendor were unable to deliver a Year 2000 compliant upgrade on
the promised schedule.  The vendor has indicated to the Company that they have a
Year 2000 compliant version of their software running in production with several
other  customers.  The Company is working with them and  monitoring  the project
closely to assure timely completion of the effort. Should the payroll vendor not
be able to deliver a Year 2000  compliant  version of their software by December
31, 1999, the Company could be required to calculate its payroll  information on
a manual basis until an alternative  payroll service  provider can be identified
and qualified.

<PAGE>

ITEM 7A.      MARKET RISK DISCLOSURES

         The Company is exposed to certain market risks,  principally changes in
interest  rates.  Market risk is the potential loss arising from adverse changes
in market rates and prices,  such as interest rates.  The Company does not enter
into  derivatives  or other  financial  instruments  for trading or  speculative
purposes.

         The Company has various long-term indebtedness  outstanding at December
31,  1998.  The  interest  impact of an increase in interest  rates of 100 basis
points (1%) would be as follows:

Instrument                         Interest Rate              Impact on Earnings
---------                          -------------                 (in thousands)
                                                                  ------------
Loan and Security Agreement        LIBOR plus 100 - 175 points     $  (117)

Senior Notes                       Fixed                                 -

Note payable - affiliate           Prime                               (70)
                                                                   -------

                                                                      (187)

Less tax benefit                                                        65

Net income reduction                                               $  (122)

ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

                                                                     Page in
                                                                     Form 10K
                                                                     --------


Report of Independent Auditors                                         15
Consolidated Balance Sheets as of December 31, 1997 and 1998           16
Consolidated Statements of Income for the Years Ended
     December 31, 1996, 1997 and 1998                                  17
Consolidated Statements of Parent Company Investment and Stockholders'
     Deficit for the years ended December 31, 1996, 1997, and 1998     18
Consolidated Statements of Cash Flows for the Years Ended
     December 31, 1996, 1997 and 1998                                  19
Notes to Consolidated Financial Statements                             20


<PAGE>

                         Report of Independent Auditors


Board of Directors
Unifrax Corporation


We  have  audited  the  accompanying  consolidated  balance  sheets  of  Unifrax
Corporation  as of  December  31, 1997 and 1998,  and the  related  consolidated
statements of income,  parent company  investment and stockholders'  deficit and
cash flows for each of the three years in the period  ended  December  31, 1998.
Our audits also included the financial statement schedule listed in the index at
Item 14(a).  These financial  statements and schedule are the  responsibility of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all  material   respects,   the  consolidated   financial  position  of  Unifrax
Corporation at December 31, 1997 and 1998 and the consolidated  results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting  principles.
Also, in our opinion, the related financial statement schedule,  when considered
in relation to the basic financial statements taken as a whole,  presents fairly
in all material respects the information set forth therein.

                                                  /s/ Ernst & Young LLP

Buffalo, New York
February 19, 1999

<PAGE>

<TABLE>
<CAPTION>


                                                        Unifrax Corporation

                                                      Consolidated Balance Sheets


                                                                                          December 31
                                                                                       1997          1998
                                                                                       ----          ----
                                                                                         (In Thousands)
<S>                                                                             <C>             <C>    

Assets
Current assets:
     Cash                                                                        $      359    $       43
     Accounts receivable, trade, less allowances of $1,254
         and $708, respectively                                                      12,095        12,328
     Accounts receivable, other                                                         625           625
     Inventories                                                                      7,885        10,343
     Deferred income taxes                                                            2,320         2,494
     Prepaid expenses and other current assets                                          411           220
                                                                                 ----------    ----------
Total current assets                                                                 23,695        26,053

Property, plant and equipment, net                                                   37,516        36,707
Deferred income taxes                                                                24,849        22,402
Organization costs, net of accumulated amortization
     of $891 and $1,642, respectively                                                 4,030         3,279
Other assets                                                                            372           213
                                                                                 ----------    ----------
                                                                                 $   90,462    $   88,654
                                                                                 ==========    ==========

Liabilities and stockholders' deficit Current liabilities:
     Note payable--affiliate                                                     $        -    $    7,000
     Current portion of long term debt                                                    -         3,750
     Accounts payable                                                                 3,206         3,306
     Accrued expenses                                                                 7,568         7,139
                                                                                 ----------    ----------
Total current liabilities                                                            10,774        21,195

Long term debt                                                                      115,500       105,950
Note payable--affiliate                                                               7,000             -
Accrued postretirement benefit cost                                                   3,209         3,472
Other long-term obligations                                                             158           161
                                                                                 ----------    ----------
Total liabilities                                                                   136,641       130,778

Stockholders' deficit
Common stock--$.01 par value; 40,000 shares authorized; 20,000 shares
     issued and outstanding                                                               -             -
Redeemable convertible cumulative preferred stock--voting; $.01 par
     value; 10,000 shares authorized; 1,666.67 shares issued and outstanding              -             -
Additional paid-in capital                                                           42,520       42,520
Accumulated deficit                                                                 (88,406)      (84,361)
Accumulated other comprehensive income                                                 (293)         (283)
                                                                                 ----------    ----------
                                                                                    (46,179)      (42,124)
                                                                                 ----------    ----------
                                                                                 $   90,462    $   88,654
                                                                                 ==========    ==========
</TABLE>

See accompanying notes to consolidated financial statements.


<PAGE>

<TABLE>
<CAPTION>

                                                    Unifrax Corporation

                                             Consolidated Statements of Income




                                                                  Year Ended December 31
                                                            1996           1997          1998
                                                            ----           ----          ----
                                                                      (In Thousands)
<S>                                                    <C>            <C>          <C>

Net sales
   Outside                                             $   90,954     $   87,111    $   85,499
   Affiliates                                                 677              -             -
                                                       ----------     ----------    ----------
                                                           91,631         87,111        85,499

Cost of goods sold                                         46,635         44,154        43,760
                                                       ----------     ----------    ----------
Gross profit                                               44,996         42,957        41,739

Selling, general and administrative expenses               20,016         20,230        20,618
Research and development                                    2,305          2,734         2,770
Allocated corporate charges                                   356              -             -
                                                       ----------     ----------    ----------

Operating income                                           22,319         19,993        18,351

Royalty income, net of related expenses                       435            350           104
Other expense                                                (325)          (304)         (117)
                                                       ----------     ----------    ----------

Income before interest and income taxes                    22,429         20,039        18,338

Interest expense                                           (2,246)       (12,537)      (11,988)
                                                       ----------     ----------    ----------

Income before income taxes                                 20,183          7,502         6,350

Provision for income taxes                                  8,543          1,937         2,305
                                                       ----------     ----------    ----------

Net income                                             $   11,640     $    5,565    $    4,045
                                                       ==========     ==========    ==========

</TABLE>

See accompanying notes to consolidated financial statements.


<PAGE>
<TABLE>
<CAPTION>



                                                    Unifrax Corporation

                      Consolidated Statements of Parent Company Investment and Stockholders' Deficit

                                                      (In Thousands)


                                                                            Accumulated
                                              Additional                       Other           Total        Parent
                                                Paid-In    Accumulated     Comprehensive   Stockholders'    Company    Comprehensive
                                                Capital      Deficit          Income          Deficit     Investment       Income
                                                -------      -------          ------          -------     ----------       ------
  <S>                                          <C>          <C>              <C>              <C>         <C>          <C>
   
   Balance at January 1, 1996                  $      -     $     -          $     -          $     -     $   35,424
   Net income for the period January
   1, 1996 to October 30, 1996                        -           -                -                -         11,006    $   11,006
   Net change in parent company
   advances                                           -           -                -                -         (6,038)            -
   Recapitalization (Note 1)                     40,020     (94,605)             (51)         (54,636)       (40,392)            -
   Net income for the period October
   31, 1996 to December 31, 1996                      -         634                -              634              -           634
   Foreign currency translation
   adjustment                                         -           -              (62)             (62)             -           (62)
                                                 ------      ------              ----             ----        ------         ------
   Comprehensive income                                                                                                     11,578

   Balance at December 31, 1996                  40,020     (93,971)            (113)         (54,064)             -

   Net Income                                         -       5,565                -            5,565              -         5,565
   Foreign currency translation
   adjustment                                         -           -             (180)            (180)             -          (180)
                                                                                                                              -----
  Comprehensive income                                                                                                       5,385
  
   Issuance of Preferred Stock                    2,500           -                -            2,500              - 
                                               --------   ---------         ---------         -------         ------
   Balance at December 31, 1997                  42,520     (88,406)            (293)         (46,179)             -

   Net Income                                         -       4,045                -            4,045              -         4,045
   Foreign currency translation
   adjustment                                         -           -               10               10              -            10
                                               --------   ---------         --------          -------         ------         ------
   Comprehensive income

   Balance at December 31, 1998              $   42,520 $   (84,361)       $   (283)      $   (42,124)       $     -
                                             ========== ===========        =========

</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

<TABLE>
<CAPTION>


                                                    Unifrax Corporation

                                           Consolidated Statements of Cash Flows

                                                                    Year Ended December 31
                                                             1996              1997             1998
                                                             ----              ----             ----
                                                                          (In Thousands)

<S>                                                       <C>              <C>            <C>

Operating activities
Net income                                                 $  11,640       $   5,565     $     4,045
Adjustments to reconcile net income to cash
     provided by operating activities:
     Depreciation and amortization                             4,091           5,323          5,649
     Provision for deferred income taxes                         214           1,802          2,273
     Loss (gain) on sales of property, plant
         and equipment                                           251              20             (7)
     Changes in operating assets and liabilities:
         Accounts receivable                                   1,042           1,136           (233)
         Inventories                                          (2,390)          2,206         (2,458)
         Prepaid expenses and other current assets              (113)           (117)           191
         Accounts payable and accrued expenses                 3,447          (1,942)          (493)
         Accrued postretirement benefit cost                     311             252            263
         Other long term liabilities                              86             (78)             3
         Other                                                    52            (180)            10
                                                         -----------     -----------    -----------
Cash provided by operating activities                         18,631          13,987          9,243

Investing activities
Capital expenditures                                          (8,267)         (9,421)        (3,821)
Deferred software and other costs                               (175)              -              -
Proceeds from sales of property, plant and equipment              90             145             62
Other investing activities                                      (227)              -              -
                                                         -----------     -----------    -----------
Cash used in investing activities                             (8,579)         (9,276)        (3,759)

Financing activities
Cash transfers to parent company, net                         (7,272)              -              -
Borrowings under revolving loan                                    -          19,350         21,600
Repayments of revolving loan                                       -         (16,850)       (22,400)
Long term borrowings                                         125,000               -              -
Repayments of long-term borrowings                            (4,250)         (7,750)        (5,000)
Increase in amounts due affiliates                             2,250               -              -
Recapitalization payment                                    (120,000)              -              -
Organization costs                                            (4,919)              -              -
                                                         -----------     -----------    -----------
Cash used in financing activities                             (9,191)         (5,250)        (5,800)
                                                         -----------     -----------    -----------
Net increase (decrease) in cash                                  861            (539)          (316)
Cash--beginning of year                                           37             898            359
                                                         -----------     -----------    -----------
Cash--end of year                                        $       898     $       359    $        43
                                                         ===========     ===========    ===========

</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>


                               Unifrax Corporation

                   Notes to Consolidated Financial Statements

                                December 31, 1998


1.   Organization And Basis Of Presentation

Unifrax Corporation ("Unifrax" or "Company") manufactures heat resistant ceramic
fiber products for automotive,  commercial,  and industrial  customers primarily
throughout  North America.  Manufacturing  facilities are located in Western New
York and  Indiana.  Unifrax  and its  predecessor,  the  North  American  Fibers
Division of The Carborundum Company ("Carborundum") was an indirect wholly-owned
subsidiary of The British Petroleum Company p.l.c. ("BP").

On October 30, 1996, the Company completed a comprehensive recapitalization (the
"Recapitalization").  Pursuant to the Recapitalization,  Unifrax redeemed 80% of
its  common  stock  held  by BP in  exchange  for a  written  promise  to pay an
aggregate of $120 million of cash (the "Interim  Obligation") and a note payable
in the amount of $7  million.  Concurrent  with the  Recapitalization,  Kirtland
Capital Partners II L.P. ("Kirtland") established two wholly-owned subsidiaries,
Unifrax Investment Corp. ("Investment") and Unifrax Holding Co. ("Holding").  In
this regard,  Investment issued $100 million of senior,  unsecured  indebtedness
and Holding  purchased 90% of the  remaining  stock of Unifrax that was owned by
BP. Subsequent to the transactions  described above,  Investment was merged with
the Company. The proceeds of the $100 million senior, unsecured indebtedness and
borrowings of $25 million under the Company's  Loan and Security  Agreement (see
Note 6) were used to repay the Interim Obligation and to pay certain transaction
costs and fees. As a result of the Recapitalization,  Holding and BP own 90% and
10%, respectively, of the Company.

The  accompanying  consolidated  financial  statements  present  the  historical
operations of Unifrax and its predecessor.

Pursuant to the Recapitalization, BP America Inc. ("BP America") a subsidiary of
BP, agreed to indemnify the Company, subject to certain limitations, against all
liabilities,  if any,  that might result from any claims for  wrongful  death or
personal  injury  caused  by  exposure  to  refractory  ceramic  fiber  products
manufactured by Unifrax prior to the consummation of the  Recapitalization,  and
against certain  environmental  liabilities arising prior to consummation of the
Recapitalization.

The Company  transacted sales of certain products through indirect  wholly-owned
subsidiaries  of BP in Europe (XPE Vertriebs GmbH) and South America (NAF Brasil
Ltda.).  Prior to the  Recapitalization,  BP  contributed  these  related  sales
corporations to Unifrax.  The results of XPE Vertriebs GmbH and NAF Brasil Ltda.
are included in the consolidated  financial  statements of Unifrax at historical
cost.

Unifrax  incurred  certain  common costs which related to both Unifrax and other
Carborundum operations.  The Company has made certain allocations of expenses in
the accompanying  consolidated  financial statements.  The Company believes that
the basis of such allocations is reasonable,  however,  the amounts could differ
from  amounts  that  would  be  determined  if the  Company  had  operated  on a
stand-alone basis during the periods presented.

2.   Saint-Gobain Sale

As part of a program to review holdings not related to its core  hydrocarbon and
chemicals  businesses,  in 1994 BP announced its intent to seek potential buyers
for  Carborundum,  including  Unifrax,  and its  related  domestic  and  foreign
affiliates (collectively the "Group"). In May 1995, BP entered into an agreement
under the terms of which it agreed to sell principally all continuing businesses
of the Group including the non-North  American Fibers businesses of Carborundum,
but excluding  Unifrax,  to Societe  Europeenne  des Produits  Refractaires  and
various other affiliates of Compagnie de Saint-Gobain  ("SEPR"). On February 29,
1996,  BP  completed  the  sale of  principally  all  continuing  businesses  of
Carborundum, but excluding Unifrax.

During the two month period ended  February 29,  1996,  the  Company's  sales to
businesses included as part of this sale amounted to $677,000.

In  connection  with this sale,  BP and SEPR  entered  into  various  agreements
regarding the ongoing  relationship  between  Unifrax and SEPR subsequent to the
closing of the transaction.  These agreements expire March 1, 2001, with certain
exceptions.  The Company  must provide  SEPR with  certain  specified  technical
services  and  product  information  for which,  in certain  circumstances,  the
Company will receive a royalty.

3.   Significant Accounting Policies

Principles of Consolidation

The consolidated  financial  statements  include the accounts of the Company and
its  subsidiaries.  All  significant  intercompany  transactions,  balances  and
profits are eliminated upon consolidation.

Revenue Recognition

Revenue  is  recognized  at the  time of  shipment  to the  customer.  Sales  to
affiliates  generally  reflect  prices  offered to the Company's  highest volume
distributors.   Provisions   are  recorded  for  probable   future  returns  and
uncollectible accounts as revenue is recognized.

Accounts Receivable

The Company  performs  periodic credit  evaluations of its customers'  financial
condition and generally does not require collateral.

Inventories

Inventories are stated at the lower of cost or market. The cost of substantially
all inventories is determined by the last-in, first-out method (LIFO).

Property, Plant and Equipment

Property,  plant  and  equipment  is stated at cost.  Depreciation  is  computed
principally  using the  straight-line  method over the estimated useful lives of
the assets which range from 3 years to 20 years for machinery and equipment, and
20 years to 45 years  for land  improvements  and  buildings.  Expenditures  for
renewals  and  improvements  that  extend  the  useful  life  of  an  asset  are
capitalized.  Expenditures  for routine  repairs and  maintenance  are generally
charged to operations when incurred.

Impairment of Long Lived Assets

The Company  reviews asset carrying  amounts  whenever  events or  circumstances
indicate  that such carrying  amounts may not be  recoverable.  When  considered
impaired, the carrying amount of the asset is reduced, by a charge to income, to
its current fair value.

Environmental Liabilities

Environmental  expenditures  that  relate  to  current  or future  revenues  are
expensed or capitalized as appropriate.  Expenditures that relate to an existing
condition  caused by past  operations  and that are not  allocable to current or
future earnings are expensed. Liabilities for environmental costs are recognized
when  environmental  assessments  or clean-ups  are probable and the  associated
costs can be reasonably estimated.

Income Taxes

Prior to the  Recapitalization  (see Note 1), the results of  operations  of the
Company's U.S.  subsidiaries  were included in the consolidated  U.S.  corporate
income tax return of BP America.  The  Company's  provision for income taxes was
computed  as if the Company  filed its annual tax returns on a separate  company
basis.  The current  portion of the income tax  provision  was  satisfied by the
Company through a charge or credit to parent company investment.

As of October 30, 1996,  the Company  entered into a tax sharing  agreement with
Holding.   The  results  of  its  operations  are  currently   included  in  the
consolidated  U.S.  corporate  income  tax  return  of  Holding.  The  Company's
provision  for income  taxes is computed as if the Company  filed its annual tax
returns on a  separate  company  basis.  The  current  portion of the income tax
provision will be satisfied by a payment to or from Holding.

Income taxes are accounted for under the  liability  method.  Under this method,
deferred tax assets and liabilities are determined based on differences  between
the financial reporting and tax bases of assets and liabilities and are measured
using the  enacted  tax rate and laws  that  apply in the  periods  in which the
deferred tax asset or liability is expected to be realized or settled.

Investment tax credits are accounted for using the flow-through method.

Accounting for Stock Based Compensation

The  Company   accounts  for  stock  options   granted  under  its   stock-based
compensation  plan in  accordance  with the  intrinsic  value  based  method  of
accounting  as  prescribed  by  Accounting  Principles  Board  Opinion  No.  25,
"Accounting  for  Stock  Issued to  Employees"  ("APB  25"),  as  allowed  under
Financial   Accounting   Standards   No.  123,   "Accounting   for   Stock-Based
Compensation" ("SFAS 123"). Accordingly,  compensation cost for stock options is
measured as the excess,  if any, of the fair market value of the Company's stock
at the date of grant over the amount an employee must pay to acquire the stock.

Advertising Costs

Advertising  costs,  which  consist   principally  of  advertisements  in  trade
journals,  brochures,  and attendance at trade shows,  are expensed as incurred.
Advertising  costs totaled  $828,000,  $792,000 and $810,000 for the years ended
December 31, 1996, 1997 and 1998, respectively.

Health, Safety and Environmental Quality Programs

Costs associated with the Company's  Health,  Safety and  Environmental  Quality
("HSEQ") programs,  which include the Company's Product Stewardship Program, the
Ceramic Fibers  Advisory  Board,  ongoing  employee health studies and workplace
exposure  monitoring  studies,  are  expensed as  incurred.  Amounts  charged to
operations  during the years ended December 31, 1996,  1997 and 1998 relating to
HSEQ and testing in connection with research and development totaled $1,559,000,
$1,253,000 and $1,738,000,  respectively,  and are included in selling,  general
and  administrative  expenses,  and research and development in the accompanying
statements of income.

Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial  statements and accompanying notes.
Actual results could differ from those estimates.

Effects of New Accounting Pronouncements

Effective  January  1,  1998,  the  Company  adopted  SFAS No.  130,  "Reporting
Comprehensive Income." Statement 130 establishes new rules for the reporting and
display  of  comprehensive  income  and its  components.  The  adoption  of this
Statement had no impact on the Company's  net income or  stockholders'  deficit.
Statement 130 requires the Company's foreign currency  translation  adjustments,
which prior to adoption were reported separately in stockholders' deficit, to be
included in other  comprehensive  income.  Prior year financial  statements have
been reclassified to conform with the requirements of Statement 130.

4.   Inventories

Major classes of inventories are as follows:

                                     December 31
                                  1997         1998
                                  ----         ----

Raw material and supplies     $   1,598    $   3,459
In-process                        1,551        2,008
Finished product                  4,410        4,341
                              ---------    ---------
                                  7,559        9,808
Adjustment to LIFO cost             326          535
                              ---------    ---------
                              $   7,885    $  10,343
                              =========    =========

The cost of  inventories  determined on the LIFO method exceeds the current cost
of inventories principally as a result of reduced manufacturing costs.

5.   Property, Plant and Equipment

Property, plant and equipment consist of the following:

 
                                                          December 31
                                                   1997                 1998
                                                   ----                 ----
                                                         (In Thousands)


Land and land improvements                       $       1,974    $       1,982
Buildings                                               18,589           18,793
Machinery, equipment, furniture and fixtures            48,909           50,759
Construction in progress                                 1,435            2,829
                                                 -------------    -------------
                                                        70,907           74,363
Less accumulated depreciation                          (33,391)         (37,656)
                                                 -------------    -------------
                                                 $      37,516    $      36,707
                                                 =============    =============

For the years ended  December  31,  1996,  1997 and 1998,  depreciation  expense
amounted to $3,910,000, $4,383,000 and $4,739,000, respectively.

6.   Long Term Debt and Note Payable -- Affiliate

Long term debt consists of the following:
                                                  December 31

                                              1997           1998
                                              ----           ----
                                                 (In Thousands)

10 1/2% Senior Notes due 2003             $  100,000    $   98,000
Loan and Security Agreement:
     Term loan                                13,000        10,000
     Revolving loan                            2,500         1,700
                                          ----------    ----------
                                             115,500       109,700
Less current portion                               -         3,750
                                          ----------    ----------
Long term debt                            $  115,500    $  105,950
                                          ==========    ==========

The Company's  Loan and Security  Agreement  dated as of October 30, 1996 ("Loan
Agreement")  enables the Company to borrow up to $45,000,000 as follows:  a term
loan of $25,000,000  (reduced by repayments  subsequent to October 30, 1996) and
revolving  loans plus letter of credit  obligations  not to exceed  $20,000,000.
Interest  rates on the revolving  loan and term loan range from LIBOR plus 1.00%
to LIBOR plus 1.75%,  as defined.  A fee of .25% is charged on the average daily
amount by which the revolving  credit amount  available  exceeds the outstanding
principal balance of revolving loans plus the letter of credit  obligations.  As
of December 31,  1998,  the Company had a letter of credit in effect of $624,000
as required by the State of New York for  Worker's  Compensation.  The  weighted
average  interest rate on the  obligations  outstanding at December 31, 1998 was
7.04% (7.68% at December  31,  1997).  All  outstanding  amounts  under the Loan
Agreement mature October 2001.

The Loan Agreement contains various restrictive covenants which include, but are
not limited to, a minimum net worth requirement, a minimum fixed charge coverage
ratio,  a  minimum   interest   coverage  ratio,  and  restrictions  on  capital
expenditures,  distributions,  and incurring debt, as defined.  Borrowings under
the Loan  Agreement  are  secured by assets of the  Company  including,  but not
limited to, accounts receivable, inventory, equipment and fixtures.

On August 25,  1998,  the Company  repurchased  $2 million  face value of Senior
Notes.

The note  payable--affiliate  accrues interest,  payable annually,  at the prime
lending  rate (7.75% at December 31, 1998;  8.50% at December  31,  1997).  This
obligation matures in October, 1999.

Maturities  of  long-term  debt and note  payable--affiliate  are as follows (in
thousands):

         1999          $    10,750
         2000                6,250
         2001                1,700
         2002                    -
         2003               98,000


Interest payments made in 1997 and 1998 amounted to $12,417,000 and $12,031,000,
respectively.

7.   Fair Value of Financial Instruments

At December  31, 1997 and 1998,  the  carrying  amount and the fair value of the
Company's  financial  instruments  were as  follows.  Bracketed  amounts  in the
carrying  amount  column  represent  liabilities  for potential  cash  outflows.
Bracketed  amounts in the fair value column  represent  estimated  cash outflows
required to currently settle the financial instrument at current market rates.

                                                        December 31
                                                 1997                  1998
                                                 ----                  ----
                                     Carrying      Fair      Carrying     Fair
                                      Amount       Value      Amount     Value
                                      ------       -----      ------     -----
                                                    (In Thousands)
Assets:                          
     Cash and cash equivalents  $     359     $    359     $      43  $     43

Liabilities:
     Long-term debt (including
         current maturities)     (122,500)    (127,500)     (116,700) (120,620)

The following methods and assumptions were used by the Company in estimating the
fair  values of  financial  instruments.  The  carrying  amount  reported in the
balance sheet for cash and cash  equivalents  approximates  fair value. The fair
value of the Company's senior notes were estimated using quoted prices. The fair
value of variable rate loans approximate carrying amounts.

8.   Related Party Transactions

Prior to the Saint-Gobain Sale (see Note 2), certain support  services,  such as
information systems, credit and collections,  payroll,  corporate communications
and health,  safety,  and  environmental  quality were  provided to all domestic
Unifrax  businesses  on a  centralized  basis by  Carborundum.  Costs  for these
services  were  allocated  based on usage.  The  Company  was  charged  for such
services in the amount of $168,000 for the two month  period ended  February 29,
1996.

In addition,  certain other indirect administrative expenses of Unifrax, as well
as research and  development  activities,  except those research and development
activities relating specifically to ceramic fiber businesses,  were allocated to
the businesses by Carborundum,  either based on the level of service provided or
based on the overall cost structure of Unifrax. Amounts allocated to the Company
amounted to $356,000 for the two month period ended February 29, 1996.

In the opinion of  management,  charges and  allocations  were  determined  on a
reasonable basis; however,  they are not necessarily  indicative of the level of
expenses  which might have been  incurred  had the Company  been  operating as a
stand-alone entity.

As a result of the sale of principally all continuing  businesses of Carborundum
except for the Company (see Notes 1 and 2), and the  elimination  of Carborundum
corporate activities,  the Company entered into a service continuation agreement
with  SEPR.   Under  the  terms  of  the   agreement,   SEPR  provided   certain
administrative  services,  substantially  similar to those  services  previously
provided by Carborundum centrally,  and charged the Company a service fee, which
approximated  the charges  previously  received  for similar  services,  for the
period March 1, 1996 to October 30, 1996.

Prior to the Recapitalization (see Note 1), the Company's property,  product and
certain other loss exposures  were insured  through  insurance  premiums paid to
indirect wholly-owned insurance subsidiaries of BP. In addition, the Company was
self-insured for all workers'  compensation loss exposures.  Insurance  premiums
charged to operations for these various  insurance  categories during the period
from  January 1, 1996 to October  30,  1996  amounted  to  $211,000.  Management
estimates the cost for these insurance  categories on a stand-alone  basis would
have been approximately $800,000 per annum for the year ended December 31, 1996.

The Company historically  performed research and development  activities for all
Carborundum   ceramic  fiber  businesses  and  performed  certain  research  and
development  services  for a joint  venture  affiliated  with  Carborundum.  The
Company  granted  licenses to the ceramic fiber  businesses  located  outside of
North  America  and to the joint  venture to use the  technology  developed  and
charged a royalty based upon the level of sales of products manufactured at such
businesses. The amounts charged to these businesses totaled $148,000 for the two
month period ended February 29, 1996, and is included in royalty income,  net of
related expenses, in the accompanying statements of income. As discussed in Note
2, the  Company,  for a period  of five  years  ending  on March 1,  2001,  will
continue to provide  ceramic fiber  businesses  located outside of North America
with specified  technical services and product information for which, in certain
situations, the Company will receive a royalty.

The Company periodically entered into product purchase transactions with certain
BP affiliates.  Purchases  from such entities  during the two month period ended
February 29, 1996 totaled $331,000.

During  1996,  the  Company  paid  Kirtland  a  financing  fee  of  $500,000  as
compensation for its services as financial  advisor.  In addition,  Kirtland and
the  Company  entered  into an  Advisory  Services  Agreement  pursuant to which
Kirtland will provide  management  consulting and financial advisory services to
the Company for an annual fee  initially in the amount of $300,000.  The Company
paid  $50,000 in 1996,  $300,000  in 1997,  and  $300,000 in 1998 to Kirtland in
connection with the Advisory Services Agreement.

As  a  consequence  of  the  Recapitalization,   Holding  advanced  the  Company
$2,250,000  in December,  1996.  During 1997 this advance was converted to 1,500
shares of 6% cumulative  preferred  stock.  To preserve its 10% ownership in the
Company,   BP   subsequently   exchanged   interest  owed  to  it  on  the  Note
payable-affiliate for 166.67 shares of 6% cumulative preferred stock.

9.   Accrued Expenses

Accrued expenses consist of the following:           

                                                          December 31
                                                      1997          1998
                                                      ----          ----
                                                        (In Thousands)

Accrued compensation and employee benefits          $  2,963    $  2,726
Ceramic fiber product stewardship and monitoring         618         742
Interest                                               2,028       1,989
Other                                                  1,959       1,682
                                                    --------    --------
                                                    $  7,568    $  7,139
                                                    ========    ========

10.  Pension and Other Retirement Benefits

Prior to the Recapitalization  (see Note 1), the Company participated in defined
benefit  retirement  plans  sponsored  by  BP  America.  These  defined  benefit
retirement plans were of two general types--flat dollar plans and salary related
plans. Flat dollar plans,  which are negotiated with unions,  pay benefits based
on length  of  service.  Salary  related  plans,  pertaining  to all  non-hourly
employees,  pay benefits  based on length of service and level of  compensation.
Annual  contributions  were made to the  defined  benefit  plans  which at least
equaled the amounts  required by law.  Contribution  amounts were  determined by
independent  actuaries  using an actuarial  cost method that had an objective of
providing an adequate  fund to meet pension  obligations  as they  matured.  The
assets of these plans are held in U.S.  and  foreign  equity  securities,  fixed
income  securities,  interest bearing cash and real estate.  Net pension expense
allocated to the Company  approximated  $52,000 in 1996.  Amounts allocated were
principally determined based on payroll.

Pursuant to the Recapitalization, for the salary related plan, BP America agreed
to vest the affected  employees in their accrued  benefits under such plan as of
the  date of the  Recapitalization  ("Closing  Date").  The  Company,  post  the
Recapitalization,  does  not  sponsor  a  defined  benefit  retirement  plan for
salaried employees.

As  required  by  the  Recapitalization  Agreement,  during  1997,  the  Company
established  a  qualified  defined  benefit  pension  plan (the  "Mirror  Plan")
covering its hourly union  employees  previously  covered by the BP America flat
dollar plan. The accrued benefit  liabilities  and related assets  pertaining to
active  employees under the flat dollar plan,  effective as of the Closing Date,
were  transferred  to the Mirror  Plan and its  related  trust  during the first
quarter of 1998.

<PAGE>

The following  tables summarize  certain  information with respect to the Mirror
Plan:

                                                         December 31
                                                     1997          1998
                                                     ---           ----
                                                       (In Thousands)

Change in Benefit Obligation
Benefit obligation at beginning of year            $    682     $    785
Service cost                                             55           43
Interest cost                                            48           54
Actuarial loss                                            -           33
Amendment                                                 -          108
                                                   --------     --------
Benefit obligation at end of year                       785        1,023

Change in Plan Assets
Fair value of plan assets at beginning of year     $    699     $    753
Actual return on plan assets                             54           86
                                                   --------     --------
Fair value of plan assets at end of year                753          839
                                                   --------     --------

Funded status                                           (32)        (184)
Unrecognized prior service cost                           -          108
Unrecognized actuarial gains                            (31)         (24)
Additional minimum liability                              -          (84)
                                                   --------     --------
Accrued pension obligation                         $    (63)    $   (184)
                                                   ========     ========

                                                     Year Ended December 31
                                                      1997           1998
                                                      ----           ----
                                                         (In Thousands)

Components of Net Periodic Pension Cost           
Service cost                                         $     55     $     43
Interest cost                                              48           54
Expected return on plan assets                            (49)         (60)
                                                     --------     --------
Net periodic pension cost                            $     54     $     37
                                                     ========     ========

Weighted Average Assumptions as of December 31
Discount rate                                            7.0%         6.5%
Expected return on plan assets                           7.0%         8.0%


Unrecognized  gains and losses are  amortized  on a  straight-line  basis over a
period   approximating   the  average   remaining   service  period  for  active
participants.

During  1997  the  Company   established  a  qualified   defined   contribution,
money-purchase pension plan for its salaried employees. Under the money-purchase
plan,  the  Company  contributes  an  amount  equal  to  2.5%  of an  employee's
applicable  annual  compensation  to  investment  accounts  as  directed  by the
employee.  The annual  expense  for the money  purchase  plan was  $422,000  and
$426,000 for the years ended December 31, 1997 and 1998, respectively.

The Company also sponsors a defined  contribution 401(k) plan which is available
to substantially all non-union employees of the Company.  Company contributions,
representing a 50% matching of employee  contributions  up to a maximum of 6% of
the employee's base pay, amounted to $314,000,  $428,000 and $427,000 during the
years ended December 31, 1996, 1997 and 1998, respectively.

In addition to pension  benefits,  the Company also provides certain health care
and  life  insurance   benefits  for  retired  employees  who  meet  eligibility
requirements.  Prior to the  Recapitalization  this was done through BP America.
Those  benefits  are  currently  provided  through  insured  arrangements.   The
Company's  policy is to fund  postretirement  benefits as insurance  premiums or
claims  become due.  Amounts  allocated to the Company by BP America for the ten
month  period  ended  October  30,  1996 were  principally  determined  based on
employer information.

The following  table  summarizes the  components of net periodic  postretirement
benefit expense  allocated to the Company by BP America for the ten months ended
October  30,  1996 and the amount  charged to expense  for the two month  period
ended December 31, 1996, and the years ended December 31, 1997 and 1998.

                                                     Year Ended December 31
                                                   1996        1997       1998
                                                   ----        ----       ----
                                                           (In Thousands)

Service cost--benefits earned                   $   115     $   214    $   214
Interest costs                                      247        134         159
Amortization of unrecognized net gain                 -         (84)       (72)
                                                -------     -------    -------
Net periodic postretirement benefit expense     $   362     $   264    $   301
                                                =======     =======    =======

The following table presents the status of the unfunded  postretirement  benefit
obligation and the amounts recognized in the Company's balance sheets:

                                                     December 31
                                                  1997          1998
                                                  ----          ----
                                                    (In Thousands)

Change in Benefit Obligation
Benefit obligation at beginning of year      $   1,920     $   2,268
Service cost                                       214           214
Interest cost                                      134           159
Actuarial loss                                       -           182
Benefits paid                                        -            (3)
                                             ---------     ---------
Benefit obligation at end of year                2,268         2,820

Unrecognized actuarial gains                       941           687
                                             ---------     ---------
Accrued postretirement benefit cost          $   3,209     $   3,507
                                             =========     =========

Weighted Average Assumptions as of December 31
Discount rate                                     7.0%           6.5%
Rate of compensation increase                     4.0%           4.0%

Pursuant to the  Recapitalization,  BP America retained  responsibility  for all
postretirement  medical  and/or life  insurance  coverage  for retirees or other
employees terminated prior to the Closing Date and for any employee who receives
benefits under other plans as defined in the Agreement.

<PAGE>

The  assumed  annual  rate of future  increase in per capita cost of health care
benefits  (health  care  cost  trend  rate)  for 1999 and  beyond  is 6% for all
beneficiaries. Assumed health care cost trend rates have a significant effect on
the amounts reported for the health care plans. A one percentage point change in
assumed health care cost trend rates would have the following effect:

                                    One Percentage      One Percentage
                                    Point Increase      Point Decrease
                                             (In Thousands)

Effect on total of service and                       
     interest cost components          $         8       $        8
Effect on postretirement
     benefit obligation                         54              (53)

Unrecognized  gains and losses are  amortized  on a  straight-line  basis over a
period   approximating   the  average   remaining   service  period  for  active
participants.

11.  Income Taxes

The provision for income taxes consists of the following:

                                    Year Ended December 31
                           1996              1997           1998
                           ----              ----           ----
                                        (In Thousands)

Current:
     Federal           $     6,671     $       100    $         -
     State                   1,658              35             32
                       -----------     -----------    -----------
                             8,329             135             32
Deferred                       214           1,802          2,273
                       -----------     -----------    -----------
                       $     8,543     $     1,937    $     2,305
                       ===========     ===========    ===========

The provision for income taxes differs from the amount  computed by applying the
statutory income tax rate as follows:

                                                   Year Ended December 31
                                             1996           1997          1998
                                             ----           ----          ----
                                                       (In Thousands)
                                           
Income before income taxes at 35% for
   1996; 34% for 1997 and 1998           $   7,064     $   2,551    $    2,159
Permanent income tax disallowances             274            66            62
State taxes, net of federal benefit          1,078           291            21
Reduction of valuation allowance                 -        (1,000)            -
Other                                          127            29            63
                                         ---------     ---------    ----------
                                         $   8,543     $   1,937    $    2,305
                                         =========     =========    ==========

<PAGE>

Deferred  income taxes reflect the net effect of temporary  differences  between
the carrying amounts of assets and liabilities for financial  reporting purposes
and the amounts used for income tax purposes. At December 31, 1997 and 1998, the
major components of deferred tax assets and liabilities were as follows:

                                                                December 31
                                                           1997             1998
                                                           ----             ----
                                                               (In Thousands)

Deferred tax liabilities
     Deferred charges                                  $     (109)   $      (47)

Deferred tax assets
     Tax goodwill and other intangible assets              28,344        26,296
     Property, plant and equipment                          4,635         1,559
     Net operating loss carryforward                        3,850         6,631
     Accrued liabilities                                    1,835         1,252
     Accrued postretirement benefit cost                    1,284         1,389
     Inventory                                                475         1,156
     Other                                                    355           160
                                                       ----------    ----------
Gross deferred tax assets                                  40,778        38,443
Valuation allowance                                        13,500        13,500
                                                       ----------    ----------
Net deferred tax assets                                    27,278        24,943
                                                       ----------    ----------
Net deferred tax asset                                 $   27,169    $   24,896
                                                       ==========    ==========

The   Recapitalization   agreement   provided   for  an  election  to  have  the
Recapitalization  (see Note 1)  treated  as an asset  purchase  for  income  tax
purposes,  with a resulting  increase in the tax basis of assets. The historical
cost  basis of assets and  liabilities  was  retained  for  financial  reporting
purposes. Also, as a result of the Recapitalization,  the Company is eligible to
receive a refundable state investment tax credit of approximately $625,000.

At December  31,  1998,  the Company  has Federal and state net  operating  loss
carryforwards  totaling  approximately  $17,395,000  which will be  available to
offset future taxable income.  These net operating loss carryforwards  expire in
2011 through 2013. The Company paid $125,000 and $11,000 for income taxes during
the years  ended  December  31, 1997 and 1998,  respectively.  During the fourth
quarter of 1997, the Company recognized a benefit of $1,000,000 for deferred tax
assets previously unrecognized.

<PAGE>

12.  Stock Options

Effective October 30, 1996 the Company  established the Unifrax Corporation 1996
Stock Option Plan to make awards of stock  options to officers and key employees
for up to  1,505  shares  of  common  stock.  The  options  are  granted  at the
approximate  fair  value of the  underlying  shares  at the  date of  grant  and
generally vest in equal amounts over a four year period from the grant date. The
options  expire ten years after grant.  A summary of stock  option  activity and
exercise prices is as follows:


<TABLE>
<CAPTION>
                                                  1996                         1997                        1998
                             -----------------------------------------------------------------------------------
                                               Exercise                    Exercise                     Exercise
                                 Options         Price        Options        Price         Options        Price
<S>                                <C>      <C>               <C>        <C>               <C>       <C>

Outstanding, January 1                 -    $         -        1,075     $     1,500        1,075    $     1,500
Granted                            1,075          1,500            -               -          161          1,500
                             -----------------------------------------------------------------------------------

Outstanding, December 31           1,075    $     1,500        1,075     $     1,500        1,236    $     1,500
                             ===================================================================================

Exercisable, end of year               -    $     1,500          268     $     1,500          577    $     1,500
                             ===================================================================================

</TABLE>

The Company has elected to account for its employee  stock options in accordance
with APB 25 and related interpretations,  as permitted by SFAS 123. As a result,
no  compensation  expense for employee stock options has been  recognized in the
financial  statements.  Companies electing to account for employee stock options
in accordance  with APB 25 must make pro forma  disclosures  of net income as if
the fair value based method of accounting  in SFAS 123 had been applied,  if the
difference between the two methods of accounting is material.  The fair value of
each option on the date of grant was $453.45, which was estimated at the date of
grant using the following weighted-average  assumptions: risk free interest rate
of 6%, dividend yield of 0%, and a weighted-average  expected life of the option
of 6 years. If the fair value based method accounting  provision of SFAS 123 had
been adopted, net income would have been $11,628,000, $5,492,000, and $3,965,000
for the years ended December 31, 1996, 1997, and 1998, respectively. The effects
of applying SFAS 123 for providing  pro forma  disclosures  are not likely to be
representative of the effects on reported net income for future years.

13.  Lease Commitments and Rentals

The Company rents three  manufacturing  facilities and certain  equipment  under
various operating leases.  The lease agreement for one of the facilities expires
2003 and contains  options  which allow the Company to extend the lease term for
up to three  additional  five year  periods,  or to purchase  the facility for a
purchase  price  determined in accordance  with the lease  agreement.  The lease
agreement for a second  facility  expires 2004 and contains  options which allow
the Company to extend the lease term for up to two additional five year periods,
or to purchase  the  facility  for a purchase  price equal to fair value.  Total
rental  expense was  $1,479,000,  $1,580,000  and $1,788,000 for the years ended
December 31, 1996, 1997 and 1998, respectively.

Future minimum lease payments under all non-cancelable operating leases having a
remaining  term in excess of one year as of December 31, 1998 are as follows (in
thousands):

         1999                 $       842
         2000                         853
         2001                         847
         2002                         774
         2003                         384
         Thereafter                    95
                               ----------
                              $     3,795
                               ==========

14.  Contingencies

Ceramic Fibers

Regulatory agencies and others,  including the Company, are currently conducting
scientific  research to determine the potential health impact resulting from the
inhalation  of  airborne  ceramic  fibers.  To date,  studies  of  workers  with
occupational  exposure  to  airborne  ceramic  fiber  have  found no  clinically
significant  relationship between prior or current exposure to ceramic fiber and
disease in humans;  however,  independent  animal  studies have  indicated  that
ceramic fiber inhaled by test animals at elevated doses can produce  respiratory
disease,  including cancer.  The results of this research have been inconclusive
as to whether or not ceramic fiber  exposure  presents an  unreasonable  risk to
humans.

From  time  to  time   Carborundum,   as  predecessor  to  Unifrax,   and  other
manufacturers  of ceramic  fibers  have been  named as  defendants  in  lawsuits
alleging death or personal injury as a result of exposure in the manufacture and
handling of ceramic fiber and other  products.  The amount of any liability that
might  ultimately  exist with  respect to these  claims or any other  unasserted
claims is presently not determinable.  The Company believes the lawsuits brought
against The  Carborundum  Company  have been  without  merit and the  litigation
currently  pending,  or to its  knowledge  threatened,  will not have a material
adverse  effect on the  financial  condition  or  results of  operations  of the
Company. The Company's belief is based on the fact that, although animal studies
have  indicated that ceramic fiber inhaled by test animals at elevated doses can
cause  disease,  there is no evidence that exposure to refractory  ceramic fiber
has resulted in disease in humans.

Consistent  with  customary  practice  among   manufacturers  of  ceramic  fiber
products,  Carborundum  entered into agreements with distributors of its product
whereby  Carborundum  agreed  to  indemnify  the  distributors   against  losses
resulting from ceramic fiber claims and the costs to defend against such claims.
To the best of the Company's knowledge,  there have been no historical,  nor are
there  any  current,   ceramic   fiber   exposure   claims  made  against  these
indemnification agreements. Consequently, the amount of any liability that might
ultimately   exist  with  respect  to  these   indemnities   is  presently   not
determinable.

Pursuant to the Recapitalization  Agreement,  BP America Inc. and certain of its
affiliates  (collectively  "BP  America"),  has agreed to indemnify  the Company
against  liabilities  for personal  injury and wrongful  death  attributable  to
exposure  which  occurred  prior to the  Closing to  refractory  ceramic  fibers
manufactured  by the  Company.  BP America has agreed to  indemnify  the Company
against all liabilities  arising from exposure claims pending at the time of the
Closing.  For all other claims arising from alleged  exposure  occurring  solely
prior to Closing,  BP America has agreed to indemnify the Company against 80% of
all losses,  until the total loss which the Company incurs reaches $3.0 million,
after which time BP America has agreed to indemnify the Company  against 100% of
such losses. BP America has agreed to indemnify the Company against all punitive
damages  attributable  to the  conduct of the Company  prior to  Closing.  Where
losses arise from alleged  exposure  both before and after  Closing,  the losses
will be  allocated  between BP America and the Company,  pro rata,  based on the
length of exposure or pursuant to  arbitration  if initiated by the Company.  To
date the Company has incurred no claims  losses  applicable  to the $3.0 million
total mentioned above.

The Company cannot avail itself of this indemnity for losses attributable to the
Company's failure to maintain a Product  Stewardship Program consistent with the
program  maintained  by  the  Company  prior  to  Closing,   as  modified  in  a
commercially   reasonable   manner  in  accordance  with  changing   regulatory,
scientific  and  technical  factors.  BP shall not  indemnify  the Company  with
respect to any  liabilities  for wrongful death or personal injury to the extent
caused by the failure of the Company to maintain a Product  Stewardship  Program
consistent  with that  maintained  by the Company  prior to the Closing.  In the
Company's  opinion,  the Product  Stewardship  Program has been  maintained in a
manner  consistent  with these  requirements.  Unifrax intends to defend ceramic
fiber claims vigorously.

Environmental Matters

The Company is subject to loss contingencies  pursuant to various federal, state
and local environmental laws and regulations. These include possible obligations
to remove or mitigate the effects on the environment of the placement,  storage,
disposal or release of certain  chemical or petroleum  substances by the Company
or by other parties.

Superfund  Sites.  The Company may be named as a potentially  responsible  party
("PRP") pursuant to the Comprehensive  Environmental  Response  Compensation and
Liability Act of 1980, as amended  ("CERCLA" or "Superfund") or comparable state
law in connection with off-site disposal of hazardous substances at three sites,
and The Carborundum  Company has entered into a Consent Decree with the New York
State Department of Environmental Conservation to remediate contamination at the
facility  located in Sanborn,  New York. While the Company's  ultimate  clean-up
liability at the sites at which the Company is a potential  PRP is not presently
determinable,  the Company does not expect to incur any material  liability with
respect to any of these sites,  individually or in the aggregate, as a result of
its activities at these sites.  Furthermore,  BP America has agreed to indemnify
the Company for certain environmental liabilities, which might ultimately exist,
under the  Recapitalization  Agreement.  In  addition,  BP America  has  assumed
liability for other  potential  off-site  clean-up  obligations  associated with
Carborundum.  The sites at which the Company has maintained  potential  off-site
liability and the Carborundum Sanborn, New York facility are described below.

         Kline Trail Site. In 1984, the Company voluntarily advised the State of
Indiana of  potential  unauthorized  disposal  of waste at an Indiana  site by a
transporter.  No  response  from the state  has been  received,  and no  further
information  about  the  potential  for  remediation  costs at the site has been
received by the  Company.  It is expected  that little or no  liability  will be
associated with this site.

         PCB Inc., Site. The New Carlisle,  Indiana, facility received a request
for information  from the EPA in 1994 concerning  potential  responsibility  for
cleanup of the PCB  Treatment  site  located in Kansas  City,  Kansas and Kansas
City,  Missouri.  Records  indicate  that a number  of  capacitors  from the New
Carlisle facility of The Carborundum Company, now Unifrax Corporation, were sent
to the PCB Treatment  site. A response  documenting  the timely  destruction  of
those materials was submitted to the EPA. In September 1997 the EPA contacted BP
America via letter to verify  that a total of 10,900  pounds of  capacitors  and
transformers had been sent to the site by BP America/Carborundum.  No additional
information  on  cleanup  timing or cost has since been  received.  Based on the
total  pounds  delivered  by all  parties to the site,  the  liability,  if any,
ultimately  attributable  to BP America or Carborundum is not expected to have a
material adverse effect on the Company's financial position.

         Osage Metals Site. Osage Metals Co., Inc. was a scrap metal business in
Kansas City, Kansas, that reclaimed metals from various sources, including metal
from used transformers and capacitors. Osage purchased transformer and capacitor
scrap metal from PCB Treatment Co., Inc.  ("PCB Inc." above) and others.  An EPA
sampling  of soil at the  Osage  site  indicated  the  presence  of PCB and lead
contamination.  In early 1998 BP  America  was  notified  by the EPA that it was
potentially  liable under CERCLA for response  costs at the Osage site.  Through
April 1997 the EPA had incurred  $1.2 million of the  estimated  $1.8 million in
cleanup  costs  related to the Osage site and was seeking  recovery of the costs
from  potentially  responsible  parties.  Based on documents BP America received
from the EPA showing volumetric rankings, BP  America/Carborundum  accounted for
approximately one tenth of one percent of the total weight of capacitors sent to
PCB Treatment, Inc. Consequently, the liability, if any, ultimately attributable
to BP America or Carborundum  is not expected to have a material  adverse effect
on the Company s financial position.

         Shulman Site.  The Company has potential  liability with respect to the
Shulman site in St. Joseph  County,  Indiana.  The site is a landfill  which the
Company  believes  to have been  contaminated  by  chemicals  migrating  from an
adjacent facility.  Plant trash from the New Carlisle facility was hauled to the
site. An agreement has been reached pursuant to which the Company,  as part of a
response group,  agreed to assume  approximately  5% of certain  response costs,
which to date  includes  $1.7  million for  installation  of a water  line.  The
Company's  share  of that  cost is under  $100,000.  The  owner of the  adjacent
facility  has  assumed  the  bulk of  site  remediation  costs  to  date.  It is
anticipated that site remediation will ultimately  involve installing a clay cap
over the site, the cost of which is not yet known.

         Sanborn Site. Under the terms of an agreement with BP America,  Unifrax
leases a portion of the  present  manufacturing  facilities  on this  site.  The
Carborundum  Company's  Sanborn,  New York  site was used by a number  of former
Carborundum  operations.  Testing  in the area has found that  contamination  by
volatile organic compounds is present in the soil and groundwater.  Neither past
nor current  operations of Unifrax are believed to have contributed to, or to be
contributing  to, the  existence of this  contamination.  While The  Carborundum
Company  entered into a Consent Decree with the State of New York under which it
was to conduct  remedial  activities  at the site, BP America has taken title to
and assumed  liability  for the  remediation  of this property as of October 30,
1996.  Efforts to remediate the site, chiefly by means of soil vapor extraction,
are expected to continue for some time.

Under the terms of the Recapitalization Agreement, BP America assumed liability,
and the rights to recovery from third parties, for environmental remediation and
other similar required actions with respect to certain environmental obligations
of Unifrax including the above, which existed as of the Closing Date.

The Company may, in the future, be involved in further environmental assessments
or clean-ups.  While the ultimate requirement for any such remediation,  and its
cost, is presently not known,  and while the amount of any future costs could be
material  to the  results  of  operations  in  the  period  in  which  they  are
recognized,  the Company does not expect these costs, based upon currently known
information and existing requirements,  to have a material adverse effect on its
financial position.

Legal Proceedings

In addition to the ceramic  fiber and  environmental  matters  discussed  above,
BP/Carborundum and Unifrax are involved in litigation relating to various claims
arising out of their  operations  in the normal  course of  business,  including
product  liability  claims.  While  the  outcomes  of this  litigation  could be
material to the results of  operations  in the period  recognized,  based on the
current claims asserted the management of the Company believes that the ultimate
liability,  if any, resulting from such matters will not have a material adverse
effect on the Company's financial position.

The  Carborundum  Company  has been  named in  numerous  legal  claims  alleging
pre-Closing  asbestos exposure.  None of the current or past products of Unifrax
are asbestos-containing  materials, as defined by OSHA. For these claims related
to pre-Closing  Carborundum Company matters, BP America has responsibility under
the Recapitalization Agreement and is managing the claims directly.

<PAGE>

15.  Stockholders' Equity

Effective  September 30, 1997, Unifrax  Corporation issued and sold 1,500 shares
of 6%  cumulative  preferred  stock of the  Company  to Unifrax  Holding  Co. in
satisfaction  of an advance of $2.25 million made by Unifrax  Holding Co. to the
Company on December 20, 1996. The advance was then canceled effective  September
30,  1997.  The  preferred  stock  thereby  acquired  by Unifrax  Holding Co. is
cumulative  with an annual  dividend  of 6% with  dividend  payments  subject to
various covenants in the Company's loan agreements.

Unifrax  Corporation  also issued and sold BP Exploration  (Alaska) Inc.  166.67
shares of 6% cumulative  preferred stock at $1,500 per share, as satisfaction in
part for interest owed through October 30, 1997, on the Note Payable--affiliate.

The preferred  stock is  redeemable,  in full, at the option of the Company,  at
$1,500 per share,  which equals the stated  value of the  preferred  stock.  The
preferred stock is convertible, at the option of the stockholder,  into an equal
number of shares of common stock.  The number of shares into which the preferred
stock is convertible is subject to adjustment  for  subsequent  stock  dividends
payable on the common stock,  stock splits or reverse  stock  splits,  and other
modifications to the common stock.

Dividends in arrears totaled  $186,250 at December 31, 1998 ($36,250 at December
31, 1997).

<PAGE>
<TABLE>
<CAPTION>



                                                           Schedule II

                                                Valuation and Qualifying Accounts

                                                       Unifrax Corporation
                                                     (Dollars In Thousands)


                                              Balance
                                                at                        Charged to                   Balance at
                                             Beginning    Charged to         Other                       End of
                                             of Period      Expense        Accounts    Deductions        Period
<S>                                          <C>            <C>            <C>          <C>             <C>

YEAR ENDED DECEMBER 31, 1998
     Deducted from asset accounts:
     Allowance for doubtful accounts         $    794        $  (404)       $    -       $     8(a)      $    382
     Allowance for return                         460            935             -         1,069(b)           326
                                             --------        -------        ------       -------         --------

     TOTAL                                   $  1,254        $   531        $    -       $   1,077       $    708
                                             ========        =======        ======       =========       ========

YEAR ENDED DECEMBER 31, 1997
     Deducted from asset accounts:
     Allowance for doubtful accounts         $    799        $     3        $    -       $     8(a)      $    794
     Allowance for return                         403            877             -           820(b)           460
                                             --------        -------        ------       -------         --------

     TOTAL                                   $  1,202        $   880        $    -       $     828       $  1,254
                                             ========        =======        ======       =========       ========

YEAR ENDED DECEMBER 31, 1996
     Deducted from asset accounts:
     Allowance for doubtful accounts         $    638        $   164        $    -       $     3(a)      $    799
     Allowance for returns                        281          1,162             -         1,040(b)           403
                                             --------        -------        ------       -------         --------

TOTAL                                        $    919        $ 1,326        $    -       $   1,043       $  1,202
                                             ========        =======        ======       =========       ========

</TABLE>


         (a)      Uncollectible accounts written off, net of recoveries.

         (b) Returns from customers during the year.


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

           None.

<PAGE>

                                    PART III


ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

         The directors and executive officers of the Company are as follows:

Name                     Age  Position
----                     ---  --------

William P. Kelly         49   Director, President and Chief Executive Officer
Mark D. Roos             43   Vice President and Chief Financial Officer
David E. Brooks          49   Vice President, Sales and Marketing
Kevin J. O'Gorman        48   Vice President, Operations
Paul J. Viola            43   Vice President, Acquisitions and Strategic 
                              Development
Paul M. Boymel           46   Vice President, Technology
Joseph J. Kuchera        41   Vice President, Human Resources
John E. Pilecki          46   Vice President, Engineering and Purchasing
James E. Cason           44   Vice President, Risk Management
Raymond A. Lancaster     53   Director
William D. Manning, Jr.  64   Director
John G. Nestor           54   Chairman of the Board
John F. Turben           63   Director
Edmund S. Wright         56   Director

         Mr. Kelly has been President and Chief Executive Officer of the Company
since February 1996. He joined Carborundum in 1972 as an engineer, and served in
several positions,  including Vice President of Carborundum's  worldwide ceramic
fiber  business  from 1993 to 1996,  Vice  President of  Carborundum's  domestic
ceramic fiber business from 1989 to 1993,  and Vice  President of  Carborundum's
European operations from 1986-1989.

         Mr. Roos has been Vice  President  and Chief  Financial  Officer of the
Company since February 1996, and has been Chief Financial Officer of the Company
since  1995.  He joined  Carborundum  in 1985 and  served in  several  financial
planning,  control  and  business  strategy  positions  until he left in 1991 to
become Vice President,  Finance and  Administration,  of The Airolite Company, a
metal  products  manufacturer.  He rejoined  Carborundum  in 1993 as Director of
Finance, Planning and Control.

         Mr. Brooks has been Vice President,  Sales and Marketing of the Company
since May 1998. Previously he was President of Monofrax, Inc., a unit of Cookson
Group/Vesuvius  Refractories,  since January 1997. Mr. Brooks  originally joined
Carborundum in 1980 and served in several positions, including Marketing Manager
of  Carborundum's  domestic ceramic fiber business from 1988 to 1993 and General
Manager of the Monofrax Refractories Division from 1993 to 1996.

         Mr. O'Gorman has been Vice  President,  Operations of the Company since
February  1996.  He joined  Carborundum  in 1990 and served as General  Manager,
Manufacturing  and Engineering of its worldwide ceramic fiber business from 1993
to 1995 and Manager,  Manufacturing for its domestic ceramic fiber business from
1990 to 1993.

          Mr.  Viola  has  been  Vice  President,   Acquisitions  and  Strategic
Development  of  the  Company  since  May  1998.  Previously  he had  been  Vice
President,  Sales and Marketing of the Company since  February  1996.  Mr. Viola
joined  Carborundum in 1978 and served in several  positions,  including General
Manager, Sales and Marketing for Carborundum's  worldwide ceramic fiber business
from 1993 to 1995 and Manager of the Automotive  Products Group of Carborundum's
Structural Ceramics Division from 1991 to 1993.

          Dr. Boymel has been Vice  President,  Research and  Development of the
Company  since  February  1996 and Manager of  Technology  since 1989. He joined
Carborundum in 1981.

         Mr.  Kuchera has been Vice  President,  Human  Resources of the Company
since  February  1996 and was  Manager  of  Human  Resources  for  Carborundum's
domestic ceramic fiber business from 1988 to 1996. He joined Carborundum in 1981
and served in several human  resource  positions in connection  with a number of
different Carborundum business units.

         Mr. Pilecki has been Vice President,  Engineering and Purchasing of the
Company since February 1996. He joined  Carborundum's  ceramic fiber business in
1976  and  has  served  in  various  engineering  and  manufacturing  positions,
including domestic engineering manager since 1990 and worldwide  engineering and
purchasing manager since 1993.

          Mr. Cason has been Vice  President,  Risk  Management,  of the Company
since 1997,  and Director of Health,  Safety,  and  Environment,  since 1996. He
joined  Carborundum  in 1993 as Director of Health,  Safety,  and  Environmental
Quality.

          Mr.  Lancaster has been a Managing  Partner of Kirtland since 1995. He
is a Director  of  Fairmount  Minerals,  Ltd.,  Management  Reports,  Inc.,  PVC
Container Corp., R Tape Corp., Shore Bridge Corp., and STERIS Corp.

          Mr.  Manning is currently  self-employed  as a management  consultant.
From 1987 to 1994, he was Senior Vice President of The Lubrizol  Corporation and
President  of  Lubrizol  Petroleum  Chemicals  Co. Mr.  Manning is a director of
Robbins and Myers, Inc., Fletcher Paper Company and Park Avenue Marble Co.

          Mr. Nestor has been with  Kirtland  since 1986 and has been a Managing
Partner of Kirtland  since 1995. He is Chairman of TruSeal  Technologies,  Inc.,
and a Director of Fairmount Minerals Ltd. and R Tape Corp.

          Mr. Turben has been with  Kirtland  since 1977 and has been a Managing
Partner of Kirtland  since  1995.  He is  Chairman  of The  Hickory  Group,  PVC
Container  Corp.  and  Harrington  &  Richardson  1871,  Inc.,  Chairman  of the
Executive  Committee  of  Fairmount  Minerals  Ltd.,  and a  Director  of  NACCO
Industries and TruSeal Technologies, Inc.

          Mr.  Wright  has been  Chairman  of the Board of  Directors  of Dakota
Catalyst  Inc.  since  1995.  From  1981 to 1994,  he was  President  and  Chief
Executive  Officer  of North  American  Refractories  Company.  Mr.  Wright is a
director of Fairmount Minerals Ltd and Glasstech, Inc.

<PAGE>

ITEM 11.      EXECUTIVE COMPENSATION

         Compensation of Directors

         All non-Executive Directors receive an annual retainer of $10,000 which
is paid in approximately quarterly installments.

         The following  table sets forth the respective  amounts of compensation
of the Chief Executive Officer and the next four highest-paid executive officers
of the Company for 1996, 1997 and 1998 (the "named executive officers").


<TABLE>
<CAPTION>

                                                   SUMMARY COMPENSATION TABLE
                                                                                                                
                                                                                  Long-Term
                                                                                 Compensation
                                                      Annual Compensation         Securities
Name and                                                                          Underlying
Principal Position                               Salary           Bonus(a)         Options
------------------                               ------           -------          -------      
<S>                              <C>             <C>             <C>              <C>

W. Kelly                         1998            224,363          88,715              N/A
President and                    1997            211,268             -0-              N/A
Chief Executive Officer          1996            168,090         $53,000           376.25

K. O'Gorman                      1998            144,034          21,851              N/A
Vice President,                  1997            128,538             -0-              N/A
Operations                       1996            120,649          30,641           161.25

J. Cason                         1998            132,252          20,522              N/A
Vice President                   1997            128,430             -0-              N/A
Risk Management                  1996            124,836          27,000            53.75

P. Viola                         1998            124,640          19,169              N/A
Vice President,                  1997            121,248             -0-              N/A
Acquisitions and                 1996            111,655          28,490           161.25
Strategic Development

M. Roos                          1998            117,768          18,193              N/A
Vice President                   1997            112,650             -0-              N/A
Chief Financial Officer          1996            106,306          22,000           107.50

</TABLE>

(a) Does not include  one-time,  nonrecurring cash bonuses paid by BP to certain
officers in 1996 relating to the Saint-Gobain and the Unifrax sales.

<PAGE>

STOCK OPTION GRANTS, EXERCISES AND YEAR-END VALUES

         The following tables set forth information  regarding grants of Unifrax
Corporation  stock options to the named  executive  officers.  The stock options
which  were  granted  in 1996  relate  to  shares  of  common  stock of  Unifrax
Corporation.  No  options  were  granted  in 1997 or 1998  and no  options  were
exercised during 1996, 1997 or 1998.

                 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                            AND FY-END OPTION VALUES

               Number of Securities Underlying      Value of Unexercised In-The-
                Unexercised Options at FY-End         Money Options at FY-End
Name              Exercisable/Unexercisable           Exercisable/Unexercisable

W. Kelly         188.00     /    188.25                      -0-
K. O'Gorman       80.50     /     80.75                      -0-
P. Viola          80.50     /     80.75                      -0-
M. Roos           53.50     /     54.00                      -0-
J. Cason          26.75     /     27.00                      -0-

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Of  the  20,000   shares  of  common   stock  of  Unifrax   Corporation
outstanding,  Unifrax  Holding Co. owns 18,000 shares or 90% and BP  Exploration
(Alaska)  Inc.,  a  subsidiary  of BP, owns 2,000  shares or 10%. Of the 1666.67
shares of cumulative preferred stock outstanding,  Unifrax Holding Co. owns 1500
shares or 90% and BP Exploration  (Alaska) Inc.,  owns 166.67 shares or 10%. The
following own shares of Unifrax Holding Co. and, consequently, have a beneficial
interest in Unifrax Corporation.

<TABLE>
<CAPTION>

                                               Number of
                                               Shares of                                   Beneficial
                                          Unifrax Holding Co.     Percent of              Ownership of
Beneficial Owner                             Common Stock     Unifrax Holding Co.         Unifrax Corp.
----------------                             ------------     -------------------         -------------

<S>                                              <C>                  <C>                 <C>

Kirtland 2550 SOM Center Road
     Suite 105
     Willoughby Hills, Ohio 44094(a)              247,000               90.5%               81.5%
William P. Kelly                                    5,000                1.8%                1.6%
Mark D. Roos                                        1,000               *                   *
Paul J. Viola                                       1,350               *                   *
Kevin J. O'Gorman                                   1,500               *                   *
James E. Cason                                      1,000               *                   *
All directors and executive officers
     of Unifrax Corporation as a group(b)          18,050                6.6%                6.6%

</TABLE>

(a)       "Kirtland"   includes  Kirtland  Capital  Partners  II  L.P.  and  its
          affiliates.  Kirtland  Capital  Corporation is the general  partner of
          Kirtland and exercises  voting control and investment  discretion with
          respect to Kirtland's  investment in Unifrax.  John F. Turben, John G.
          Nestor and Raymond A. Lancaster are advisory board members of Kirtland
          Capital Corporation.

(b)       Excludes shares held by Kirtland of which Messrs.  Turben,  Nestor and
          Lancaster may be deemed to be  beneficial  owners as a result of their
          control of Kirtland. Messrs. Turben, Nestor and Lancaster disclaim any
          such beneficial ownership.

ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Reference is made to the information  included in paragraph 2 of Item 1 and
Notes 1 and 14 of the financial  statements contained in Item 8, which is hereby
incorporated herein by reference.

RELATIONSHIP WITH BP AND ITS SUBSIDIARIES

     Stockholders  Agreement.  On October 30, 1996,  Unifrax  Holding Co. and BP
Exploration  (Alaska),  Inc. ("BPX") entered into an agreement relating to their
respective  ownership  of stock of the Company (the  "Stockholders  Agreement").
This agreement (i) in certain  circumstances  grants BPX  preemptive  rights and
rights of first  refusal with respect to issuances and sales,  respectively,  of
stock of the Company; (ii) grants BP piggyback  registration rights with respect
to equity  securities of the Company;  (iii) restricts in certain  circumstances
the ability of the Company to enter into certain  dilutive or  non-arm's  length
transactions;   and  (iv)  grants  BP  the  right  to   participate  in  certain
circumstances  in sales by Unifrax  Holding  of  Holding's  common  stock of the
Company.

      Recapitalization  Agreement.   Pursuant  to  the  Unifrax  Corporation
Recapitalization Agreement ("Recapitalization Agreement"), BP America, Inc. ("BP
America") has agreed to indemnify the Company as set forth below.

     General Indemnity. The Recapitalization Agreement provides that, subject to
certain limitations,  BP America and certain of its affiliates shall jointly and
severally indemnify the Company and Holding against, among other things, any and
all  claims,  damages,  losses,  expenses,   costs,  penalties,   liens,  fines,
assessments,  obligations  or  liabilities  of any  kind,  arising  from all the
discontinued  operations of the Company or its  subsidiaries.  The  discontinued
operations  include  but  are  not  limited  to  certain   previously   divested
businesses, any other former Carborundum business not part of the Company or its
foreign  subsidiaries,  and the Sanborn,  New York, real estate transferred from
the Company to a BP subsidiary  prior to Closing.  BP America also has agreed to
indemnify the Company and Holding for any breach of a representation or warranty
set forth in the Recapitalization Agreement.

     Health and Safety Indemnity. Pursuant to the Recapitalization Agreement, BP
America has agreed to indemnify the Company and Holding against  liabilities for
personal injury and wrongful death attributable to exposure prior to the Closing
to refractory ceramic fibers  manufactured by the Company. BP America has agreed
to  indemnify  the Company and Holding  against  all  liabilities  arising  from
exposure claims pending at the time of the Closing. For all other claims arising
from alleged exposure  occurring solely prior to Closing,  BP America has agreed
to indemnify the Company and Holding against 80% of all losses,  until the total
loss which the Company incurs reaches $3.0 million,  after which time BP America
has agreed to indemnify the Company and Holding against 100% of such losses.  BP
America has agreed to  indemnify  the Company and Holding  against all  punitive
damages  attributable  to the  conduct of the Company  prior to  Closing.  Where
losses arise from alleged  exposure  both before and after  Closing,  the losses
will be  allocated  between BP America and the Company,  pro rata,  based on the
length of exposure or pursuant to arbitration if initiated by the Company.

     The Company cannot avail itself of this  indemnity for losses  attributable
to the Company's failure to maintain a Product  Stewardship  Program  consistent
with the program  maintained by the Company  prior to Closing,  as modified in a
commercially   reasonable   manner  in  accordance  with  changing   regulatory,
scientific  and  technical  factors.  BP America shall not indemnify the Company
with respect to any  liabilities  for wrongful  death or personal  injury to the
extent  caused by the failure of the  Company to maintain a Product  Stewardship
Program consistent with that maintained by the Company prior to the Closing.

     Environmental  Indemnity.  Pursuant to the Recapitalization  Agreement, and
subject to certain  limitations,  BP America has agreed to indemnify the Company
and  Holding  against   environmental   liabilities   arising  from  pre-closing
conditions.  The Recapitalization  Agreement also provides that BP America shall
indemnify the Company and Holding  against  off-site  liabilities  caused by the
transport,  storage  or  disposal  of  hazardous  substances  as well as for the
remedial obligations at the Sanborn, New York site.

     Non-compete  Agreement.  At the Closing,  BP entered  into the  Non-compete
Agreement  with  Holding  providing  that for a period  of five  years  from the
Closing,  BP and its affiliates will not,  anywhere in the world,  own,  advise,
consult,  manage,  operate,  join, control, be associated with or participate in
the  ownership,  management,  operation or control of any business that competes
with the  Company  or its  subsidiaries.  Holding  paid BP $10  million  for the
Non-compete Agreement.

     Sanborn  Lease.  Prior to the  Closing,  the Company  transferred  the real
property located in Sanborn,  New York (the "Sanborn  Property") to a subsidiary
of BP  America.  BP America  leased the real  property  comprising  the  Sanborn
Property  currently  used by the  Company in its  operations  to the  Company in
accordance  with the terms and conditions of a 20 year lease (the "Lease").  The
Lease  provides that the Company will be  responsible  for taxes,  utilities and
insurance.  The Company has an option to purchase  the property for $1.00 at any
time during the 20-year  lease term.  The Company  will  utilize  this  facility
pursuant to a lease,  rather than fee  ownership,  in order to preserve  maximum
flexibility for possible consolidation of operations in the future.

RELATIONSHIP WITH KIRTLAND AND UNIFRAX HOLDING CO.

     Kirtland Advisory Services Agreement. As part of the Recapitalization,  the
Company paid  Kirtland a financing fee of $500,000 and  reimbursed  Kirtland for
its  out-of-pocket  expenses  as  compensation  for its  services  as  financial
advisor. Also at the Closing,  Kirtland and the Company entered into an Advisory
Services Agreement pursuant to which Kirtland will provide management consulting
and  financial  advisory  services to the Company for an annual fee initially in
the amount of $300,000,  which  amount may be increased up to $500,000  with the
approval of the members of the Board of Directors of the Company who do not have
a direct financial  interest in any person receiving payments under the Advisory
Services  Agreement.  In  addition,  if the Company  completes  an  acquisition,
Kirtland  will be entitled to receive a fee in an amount which will  approximate
1% of the gross purchase price of the acquisition  (including assumed debt). The
Advisory Services  Agreement included  customary  indemnification  provisions in
favor of Kirtland.

     Tax Sharing Agreement.  Holding will file a consolidated federal income tax
return,  under  which the  federal  income  tax  liability  of  Holding  and its
subsidiaries  will be determined on a  consolidated  basis.  Holding has entered
into a tax sharing agreement with the Company (the "Tax Sharing Agreement"). The
Tax Sharing Agreement provides that in any year in which the Company is included
in any  consolidated  tax return of Holding and has taxable income,  the Company
will pay to Holding  (except  with respect to tax  benefits  resulting  from the
Non-compete  Agreement  between BP and Holding) the amount of the tax  liability
that the  Company  would have had on such date if it had been  filing a separate
return.  Conversely,  if the Company  generates losses or credits which actually
reduce the consolidated tax liability of Holding and its other subsidiaries,  if
any,  Holding  will credit to the Company  the amount of such  reduction  in the
consolidated  tax  liability.  In the event any state and local income taxes are
determinable  on a combined  or  consolidated  basis, the  Tax Sharing Agreement
provides for a similar allocation between Holding  and the Company of such state
and local taxes.

<PAGE>


                                     PART IV


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

(a) The following documents are filed as part of this report:
                                                                     Page in
                                                                    Form 10-K
                                                                    ----------

(1)  FINANCIAL STATEMENTS

       Audited consolidated financial statements of the Company
       as of December 31, 1997 and 1998, and for the three years
       in the period ended December 31, 1998.                          15

(2)  FINANCIAL STATEMENT SCHEDULE

       II - Valuation and Qualifying Accounts                          37

       All other schedules have been omitted as the required
       information is not applicable or the information is
       presented in the financial statements or the notes
       thereto.


(3)  EXHIBITS

     2.1(i)    Unifrax Corporation Recapitalization Agreement

     3.1(i)    Certificate of Incorporation of the Registrant

     3.2(iii)  Consent of Stockholders for Amendment of Certificate of 
               Incorporation

     3.3(iii)  Certificate of Amendment to Certificate of Incorporation

     3.4(i)    By-laws of the Registrant

     4.1(i)    Form of Indenture (including form of Note)

     10.1(i)   Form of Loan and Security  Agreement  among Unifrax
               Corporation,  Bank of  America  Illinois  and the  lenders
               party thereto (Credit Agreement)

     10.2(ii)  First Amendment to Loan and Security Agreement

     10.3(iv)  Second Amendment to Loan and Security Agreement

     10.4(i)   1996 Stock Option Plan

     10.5(ii)  Unifrax Corporation Noncompetition Agreement

     10.6(i)   Lease relating to Tonawanda plant

     10.7(i)   Lease relating to Amherst plant

     10.8(i)   Sanborn Lease

     10.9(i)   Covenant Not to Compete between The British Petroleum
               Company p.l.c., its affiliates,  and the Unifrax
               Corporation   and   Societe    Europeenne   des   Produits
               Refractaires, and its affiliates (portions of this Exhibit
               have been  omitted and will be filed  separately  with the
               Commission   pursuant  to  a  request   for   confidential
               treatment)

     10.10(i)  Product Distribution Agreement between the Unifrax
               Corporation   and   Societe    Europeenne   des   Produits
               Refractaires  (portions  of this Exhibit have been omitted
               and will be filed separately with the Commission  pursuant
               to a request for confidential treatment)

     10.11(i)  Distributed  Product License Agreement between the
               Unifrax  Corporation  and Societe  Europeenne des Produits
               Refractaires  (portions  of this Exhibit have been omitted
               and will be filed separately with the Commission  pursuant
               to a request for confidential treatment)

     10.12(i)  License  Agreement between the Unifrax Corporation
               and Societe Europeenne des Produits Refractaires (portions
               of this  Exhibit  have  been  omitted  and  will be  filed
               separately  with the Commission  pursuant to a request for
               confidential treatment)

     10.13(i)  Trademark License and Consent Agreement between the Unifrax
               Corporation and Societe Europeenne des Produits Refractaires

     10.14(i)  Conversion    Agreement    between   the   Unifrax
               Corporation   and   Societe    Europeenne   des   Produits
               Refractaires  (portions  of this Exhibit have been omitted
               and will be filed separately with the Commission  pursuant
               to a request for confidential treatment)

     10.15(i)  XPE(TM) License Agreement between the Unifrax Corporation
               and Societe Europeenne des Produits Refractaires

     10.16(i)  Form of Covenant Not to Compete between Holding and BP

     10.17(i)  Form of Stockholders Agreement among the Company, BPX and Holding

     10.18(iii)Amendment to Stockholders Agreement dated September 30, 1997,
               among the Company, BP Exploration (Alaska), Inc. and Holding

     10.19(iii)Stock Purchase Agreement dated September 30, 1997, between the
               Company and Holding

     10.20(iii)Stock Purchase  Agreement  dated  September 30,
               1997,  between the Company  and BP  Exploration  (Alaska), Inc.

     10.21(i)  Tax Sharing Agreement between the Company and Holding

     10.22(i)  Advisory Services Agreement between the Company and Kirtland
               Capital Corporation

     10.23(i)  Form of BP Note

     10.24     Termination Agreement dated December 4, 1998 relative
               to the  Conversion  Agreement  and the purchase of certain
               assets from SEPR

     12.1      Computation of Ratio of Earnings to Fixed Charges

     21.1      Subsidiaries of the Registrant

     27.1      Financial Data Schedule

    (i)        Incorporated by reference to the exhibits filed with the
               Registration Statement on Form S-1 of Unifrax
               Investment Corp (Registration No. 333-10611).

    (ii)       Incorporated  by reference to the exhibits filed with Form
               10-K for the fiscal year ended  December  31, 1996 for Unifrax
               Corporation.

     (iii)     Incorporated by reference to the exhibits filed with Form
               10-K for the fiscal year ended  December  31, 1997 for Unifrax
               Corporation.

     (iv)      Incorporated  by reference to the exhibits filed with Form
               10-Q for the fiscal  quarter  ended June 30,  1998 for Unifrax
               Corporation.


(b) No  reports on Form 8-K have been  filed  during the period  covered by this
report.


<PAGE>


                                   SIGNATURES


         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 29, 1999.

                                                UNIFRAX CORPORATION.

                                                By: /s/William P. Kelly
                                                William P. Kelly, President and
                                                Chief Executive Officer

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities and on the dates indicated.

Signature                             Title                          Date
---------                             -----                          ----
                             

 /s/William P. Kelly                                             March 29, 1999
 -------------------
 William P. Kelly             Director, President and Chief
                              Executive Officer (Principle
                              Executive Officer)


 /s/Mark D. Roos                                                 March 19, 1999
 ---------------
 Mark D. Roos                 Vice President & Chief
                              Financial Officer (Principal
                              Financial Officer and Principal
                              Accounting Officer)

 /s/John G. Nestor                                               March 29, 1999
 -----------------
 John G. Nestor               Chairman of the Board


 /s/Raymond A. Lancaster
 -----------------------                                         March 29, 1999
 Raymond A. Lancaster         Director


 /s/William D. Manning, Jr.                                      March 29, 1999
 --------------------------
 William D. Manning, Jr.      Director


 /s/John F. Turben                                               March 29, 1999
 -----------------
 John F. Turben               Director


 /s/Edmund S. Wright                                             March 29, 1999
 -------------------
 Edmund S. Wright             Director


<PAGE>

EXHIBIT 12.1      UNIFRAX CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED
                  CHARGES

                                                    Year Ended December 31
                                                 1996       1997         1998
                                                 ----       ----         ----
                                                      (In Thousands)

Earnings from continuing operations before
     income taxes                            $  20,183   $   7,502    $   6,350

Fixed charges
     Interest                                    2,246      12,537       11,988
     Imputed interest on operating lease
         obligations                               286         403          381
                                             ---------   ---------    ---------
                                                 2,532      12,940       12,369
Adjusted earnings available for payment of
     fixed charges                           $  22,715   $  20,442    $  18,719
                                             =========   =========    =========

Ratio of earnings to fixed charges                 9.0         1.6          1.5
                                             =========   =========    =========