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, 1997

                             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. Unifrax and its predecessor,  the North
American Fibers Division of The Carborundum Company 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. and its
affiliates  ("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 were used to repay the Interim Obligation. As a result
of the Recapitalization,  Holding and BP own 90% and 10%,  respectively,  of the
Company.

         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.

         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.

         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.  These niche
markets,  which include  automotive,  power generation,  and fire protection now
account for the majority of the Company's net sales.

MARKETS

         As a result  of a  covenant  not to  compete  entered  into  with  SEPR
(reference  is made to the  information  under the  heading  "Relationship  With
SEPR-Covenant Not to Compete" provided under Item 13 of this Form 10-K, which is
hereby  incorporated  herein by  reference),  the  Company  is  prohibited  from
manufacturing,  selling or distributing  any ceramic fiber products  outside the
North American  market until March 1, 2001 except XPE(TM) which the Company will
sell worldwide and certain products for which SEPR will act as distributor.

         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.

         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 one
supplier in China and the balance from a U.S. supplier. Because vermiculite from
the Chinese 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 Chinese 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  2.5%  and 3.1% of net  sales  during  the  years  1996 and  1997,
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  is 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 will be taken for a period of five years
to conclude 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 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  15 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, 1997, the Company employed approximately 400 persons
on a full-time  basis,  Approximately  60 employees at the  Company's  Tonawanda
plant are members of the Oil, Chemical and Atomic Workers union.

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.


                     Approximate
Plant Site           Square Feet     Status   Use
----------           -----------     ------   ---
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

ITEM 3. LEGAL PROCEEDINGS

         Reference  is  made  to the  information  included  in  Note  15 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

         The Company's stock is not traded on public markets.

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,
                                    1993         1994            1995          1996           1997
                                    ----         ----            ----          ----           ----
                                                        (Dollars in Thousands)
STATEMENT OF INCOME DATA:
<S>                                 <C>           <C>             <C>           <C>            <C>
Net sales                           $67,692       $76,246         $84,064       $91,631        $87,111

Income before interest, taxes
     and cumulative effect of
     change in accounting
     principle                       13,539        17,708          21,448        22,429         20,039
Interest expense                          0             0               0         2,246         12,537
Provision for income taxes            5,611         7,256           8,743         8,543          1,937
                                    -------       -------         -------       -------         ------
Income before cumulative
     effect of change in
     accounting principle             7,928        10,452          12,705        11,640          5,565
Cumulative effect of change
     in accounting principle         (2,658)(a)        --              --            --             --
                                    -------       -------         -------       -------        -------
Net income                          $ 5,270       $10,452         $12,705       $11,640        $ 5,565
                                    =======       =======         =======       =======        =======

OTHER DATA:
EBITDA(b)                           $17,510       $21,928         $25,749       $26,520        $25,362
Depreciation and amortization         3,971         4,220           4,301         4,091          5,323
Cash Flows From Operating
     Activities                      10,172        11,324          18,925        18,631         13,987
Cash Flows From Investing
     Activities                      (2,950)       (2,578)         (3,593)       (8,579)        (9,276)
Cash Flows From Financing
     Activities                      (7,134)       (8,743)        (15,393)       (9,191)        (5,250)
</TABLE>
<TABLE>
<CAPTION>

                                                        Year Ended December 31,
                                    1993         1994            1995          1996           1997
                                    ----         ----            ----          ----           ----
                                                        (Dollars in Thousands)

BALANCE SHEET DATA (AT PERIOD
     END):
<S>                                 <C>           <C>             <C>           <C>            <C>
Working capital                     $13,583       $16,688         $14,763       $14,022        $12,921
Long Term Debt                            0             0               0       127,750        122,500
Total assets                         55,105        56,897          54,239        93,391         90,462
Total liabilities                    18,634        18,943          18,815       147,455        136,641
Parent company
     investment(c)                   36,471        37,954          35,424            --             --
Stockholders' Deficit(c)                 --            --              --       (54,064)       (46,179)
</TABLE>

(a)  Represents the cumulative  effect of a change in accounting  principle made
     in 1993 related to the  accounting for  postretirement  benefits other than
     pensions.

(b)  "EBITDA" means earnings from  operations  before interest  expense,  taxes,
     depreciation,  amortization,  and cumulative effect of change in accounting
     principle.  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.

(c)  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.  Additional  oral or written  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 a source in China.

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.

RESULTS OF OPERATIONS
                                         Year Ended December 31,
                                     1995              1996             1997

Net sales                           100.0%            100.0%           100.0%
Cost of goods sold                   48.3              50.9             50.7
                                    -----             -----            -----
Gross profit                         51.7              49.1             49.3
Selling and distribution             13.8              14.1             14.9
Administration                        7.4               7.8              8.3
Allocated corporate charges           3.2               0.4                -
Research & development                2.9               2.5              3.1
                                    -----             -----            -----
Operating income                     24.4              24.4             23.0
<PAGE>
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 and distribution  expenses  increased by $0.1 million or 1.0%, from
$12.9 million in 1996 to $13.0 million in 1997 as a result of inflation,  offset
partially  by the effects of the lower sales  volume.  Selling and  distribution
expense as a percentage  of net sales  increased  from 14.1% in 1996 to 14.9% in
1997.

     Administration  expenses and allocated  corporate charges decreased by $0.3
million or 3.6% from $7.5  million in 1996 to $7.2  million 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 under
"Administration." Administration expenses as a percentage of net sales were 8.2%
in 1996 and 8.3% in 1997.

     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.

YEAR ENDED DECEMBER 31, 1996, COMPARED WITH YEAR ENDED DECEMBER 31, 1995

Net sales  increased  $7.5 million,  or 8.9% from $84.1 million in 1995 to $91.6
million in 1996. This increase was  principally  due to continued  strong demand
for   bulk  and   blanket   products   in  the   furnace-related   market,   for
automotive-related  products,  and for  other  niche  market  applications.  The
increase was partially offset by lower sales of porosity-controlled products due
to program design and shipment timing.

         Gross profit  increased  $1.6 million,  or 3.6%,  from $43.4 million in
1995 to $45.0  million in 1996.  This  increase  was the result of higher  sales
volume.  Gross profit margin decreased from 51.7% in 1995 to 49.1% in 1996. This
decline was due to outside purchases and resales of ceramic fiber resulting from
capacity  constraints  at the Company's New  Carlisle,  Indiana  facility and to
one-time expenses associated with the facility expansion project.

         Selling and  distribution  expenses  increased $1.3 million,  or 11.2%,
from $11.6  million in 1995 to $12.9  million in 1996.  This  increase  resulted
primarily from the addition of sales and  distribution  operations in Europe and
Brazil  following the  Saint-Gobain  Sale and higher sales  volume.  Selling and
distribution expenses as a percentage of net sales increased slightly from 13.8%
in 1995 to 14.1% in 1996.

         Administration  expenses  increased $0.9 million,  or 15.2%,  from $6.2
million in 1995 to $7.1 million in 1996. This increase  resulted  primarily from
the  addition  of  selling  and  distribution  operations  in Europe  and Brazil
following the Saint-Gobain Sale, and from various expenses  associated with BP's
divestment of the Company.  Administration expenses as a percentage of net sales
increased slightly from 7.4% in 1995 to 7.8% in 1996.

         Allocated  corporate charges decreased $2.3 million,  or 87%, from $2.7
million in 1995 to $0.4 million in 1996.  Allocated  corporate  charges for 1995
were recognized for the entire year. 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,  including  temporary purchases
from  Saint-Gobain.  The arm's length  purchases of services are included  under
"Administration."

         Research and development expenses decreased $0.1 million, or 5.9%, from
$2.4 million in 1995 to $2.3 million in 1996. This decrease was primarily due to
the timing of new product testing.

         Operating income increased $1.8 million, or 8.8%, from $20.5 million in
1995 to $22.3  million in 1996.  Operating  income as a percentage  of net sales
remained relatively flat at about 24.4% from 1995 to 1996.

         Net income decreased $1.1 million,  or 8.4%, from $12.7 million in 1995
to $11.6 million in 1996  primarily as a result of interest  charges on the debt
associated  with the  Recapitalization.  Net income as a percentage of net sales
decreased  from  15.1%  in 1995 to  12.7%  in 1996 as a  result  of the  factors
discussed above.

         EBITDA  increased $0.8 million,  or 3.0%, from $25.7 million in 1995 to
$26.5 million in 1996. The  improvement in EBITDA is attributable to the factors
discussed  above,  despite a slight decrease in depreciation and amortization of
$0.2 million,  or 4.9%,  from $4.3 million in 1995 to $4.1 million in 1996. On a
percentage of net sales basis,  EBITDA  decreased from 30.6% in 1995 to 28.9% in
1996.

         Capital expenditures in 1996 were $8.3 million and included projects to
improve efficiency,  as well as add capacity in New Carlisle,  Indiana.  Working
capital,  excluding  cash,  deferred  taxes,  and interest  declined  from $12.3
million  in 1995 to $9.9  million  in 1996  due to  lower  receivables  from the
Carborundum overseas units and higher trade payables and accruals in 1996.

Cash flows from operating  activities  decreased slightly from $ 18.9 million in
1995 to $18.6 million in 1996. Cash outflows from investing activities increased
$5.0 million from $3.6 million in 1995 to $8.6 million in 1996 due to the higher
capital  expenditures  associated  with the  plant  expansion  in New  Carlisle,
Indiana.  Cash outflows from financing decreased $6.2 million from $15.4 million
in 1995 to $9.2 million in 1996.

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,  1997,  the  Company  was in
compliance with all Credit Agreement and Indenture covenants.

         As a result of a post closing working capital adjustment between BP and
Holding,  BP paid Holding $2.50 million in December 1996.  Holding  subsequently
advanced  the Company  $2.25  million,  which the  Company  then used to further
reduce its then  outstanding  $25.0  million term loan.  In  September  1997 the
advance from Holding was converted to 6% cumulative preferred stock.

         During  1997  the  Company  made  voluntary  prepayments  of  principal
totalling $7.7 million on its Term Loan thereby reducing the balance outstanding
from $20.75  million at December 31, 1996 to $13.0 million at December 31, 1997.
As a result of these  actions,  the Company will have no  mandatory  third party
principal  payments due in 1998.  As of December  31, 1997 the Company  borrowed
$2.5 million against its $20.0 million revolving credit facility.

         Management  believes that cash flows from  operations and the available
credit  facility will be sufficient  to fund  operating and capital  expenditure
needs for 1998.

         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 BPA. 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.

         The Unifrax  Corporation  Recapitalization  Agreement  provided  for an
election to have the  Recapitalization  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.  As a result, the Company recognized a deferred tax asset of
approximately  $31,266,000  (net  of  a  valuation  allowance  of  approximately
$15,000,000).  The valuation  allowance was established  based upon management's
current estimate of the realization of the deferred tax asset. 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,  1997,  the Company  had Federal and state net  operating  loss
carryforwards  totaling  approximately  $10,900,000  which will be  available to
offset future taxable income.  These net operating loss carryforwards  expire in
2011 through 2012.

LEGAL PROCEEDINGS

Reference  is made to the  information  included in Note 15 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 have time-  sensitive  software that recognize a date using "00" as the
year 1900  rather  than the year  2000.  This  could  cause a system  failure or
miscalculations  causing  disruptions  of  operations,  including,  among  other
things, a temporary inability to process transactions,  send invoices, or engage
in similar normal business activities.

The  Company  has  completed  an  assessment  and will have to modify or replace
portions of its software so that its computer  systems  will  function  properly
with  respect  to dates in the year 2000 and  thereafter.  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 $75,000,  primarily for assessment of the Year 2000 issue
and the development of a modification plan.

The project is estimated to be completed not later than December 31, 1998, which
is prior  to any  anticipated  impact  on its  operating  systems.  The  Company
believes that with  modifications  to existing  software and  conversions to new
software, the Year 2000 Issue will not pose significant operational problems for
its computer  systems.  However,  if such  modifications and conversions are not
made,  or are not  completed  timely,  the Year 2000 Issue could have a material
impact on the operations of the Company.

The costs of the  project  and the date on which the  Company  believes  it will
complete the Year 2000  modifications  are based on management's best estimates,
which were derived utilizing  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 such  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 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 Year 2000 problems on its vendors,  customers,  agents or other third
parties,  but its 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.

ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

                                                                        Page in
                                                                       Form 10K

Report of Independent Auditors......................................... 13
Consolidated Balance Sheets as of December 31, 1996 and 1997........... 14
Consolidated Statements of Income for the Years Ended
     December 31, 1995, 1996 and 1997.................................. 15
Consolidated Statements of Parent Company Investment and Stockholders'
     Deficit for the years ended December 31, 1995, 1996, and 1997..... 16
Consolidated Statements of Cash Flows for the Years Ended
     December 31, 1995, 1996 and 1997.................................. 17
Notes to Consolidated Financial Statements ............................ 18


<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, 1996 and 1997,  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, 1997.
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, 1996 and 1997 and the consolidated  results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting  principles.
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 27, 1998

<PAGE>
                               Unifrax Corporation

                           Consolidated Balance Sheets
<TABLE>
<CAPTION>


                                                                                        December 31
                                                                                 1996               1997
                                                                                 ----               ----
                                                                                      (In Thousands)
ASSETS
Current assets:
<S>                                                                              <C>                <C>
     Cash                                                                        $    898           $    359
     Accounts receivable, trade, less allowances of $1,202
         and $1,254, respectively                                                  13,231             12,095
     Accounts receivable, other                                                       625                625
     Inventories                                                                   10,091              7,885
     Deferred income taxes                                                          5,395              2,320
     Prepaid expenses and other current assets                                        294                411
                                                                                 --------           --------

Total current assets                                                               30,534             23,695

Property, plant and equipment, net                                                 33,939             37,516
Deferred income taxes                                                              23,576             24,849
Organization costs, net of accumulated amortization
     of $129 and $891, respectively                                                 4,792              4,030
Other assets                                                                          550                372
                                                                                 --------           --------
                                                                                 $ 93,391           $ 90,462
                                                                                 ========           ========

LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities:
     Accounts payable                                                            $  5,831           $  3,206
     Accrued expenses                                                               8,431              7,568
     Amounts due affiliates                                                         2,250                  -
                                                                                 ---------          --------

Total current liabilities                                                          16,512             10,774

Long term debt                                                                    120,750            115,500
Note payable--affiliate                                                             7,000              7,000
Accrued postretirement benefit cost                                                 2,957              3,209
Other long-term obligations                                                           236                158
                                                                                 --------           --------

Total liabilities                                                                 147,455            136,641

STOCKHOLDERS' DEFICIT
Common  stock--$.01  par value;  shares  authorized--40,000  - December 31, 1997
     (50,000-December 31, 1996), shares
     issued and outstanding--20,000                                                     -                  -
Redeemable convertible cumulative preferred stock--voting;
     $.01 par value; shares authorized--10,000, shares issued
     and outstanding--1666.67 - December 31, 1997
     (none - December 31, 1996)                                                         -                  -
Additional paid-in capital                                                         40,020             42,520
Accumulated deficit                                                                (93,971)           (88,406)
Cumulative translation adjustment                                                     (113)              (293)
                                                                                  --------           --------

                                                                                   (54,064)           (46,179)
                                                                                  --------           --------
                                                                                 $ 93,391           $ 90,462
                                                                                 ========           ========
</TABLE>
See accompanying notes to consolidated financial statements.


<PAGE>
                               Unifrax Corporation

                        Consolidated Statements of Income

<TABLE>
<CAPTION>

                                                         Year Ended December 31
                                                1995              1996             1997
                                                ----              ----             ----

NET SALES
<S>                                              <C>               <C>              <C>
Outside                                          $ 79,986          $ 90,954         $ 87,111
Affiliates                                          4,078               677                -
                                                 --------          --------         --------
                                                   84,064            91,631           87,111
OPERATING EXPENSES
Cost of goods sold                                 40,630            46,635           44,154
Selling and distribution                           11,579            12,881           13,007
Administration                                      6,189             7,135            7,223
Allocated corporate charges                         2,700               356                -
Research and development                            2,450             2,305            2,734
                                                 --------          --------          -------
                                                   63,548            69,312           67,118
                                                 --------          --------          -------

Operating income                                   20,516            22,319           19,993

Interest expense                                        -            (2,246)         (12,537)
Royalty income, net of related expenses               953               435              350
Other expense                                         (21)             (325)            (304)
                                                 --------          --------          --------
                                                      932            (2,136)         (12,491)
                                                 --------          --------          --------

Income before income taxes                         21,448            20,183            7,502
Provision for income taxes                          8,743             8,543            1,937
                                                 --------          --------          -------

NET INCOME                                       $ 12,705          $ 11,640          $ 5,565
                                                 ========          ========          =======

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



<PAGE>
                               Unifrax Corporation

 Consolidated Statements of Parent Company Investment and Stockholders' Deficit

                                 (In Thousands)

<TABLE>
<CAPTION>



                                              Additional                Cumulative      Total         Parent
                                                Paid-In    Accumulated  Translation  Stockholders'   Company
                                                Capital     Deficit     Adjustment     Deficit     Investment
                                               --------    -----------  -----------  ------------- ----------
<S>                                             <C>          <C>          <C>          <C>          <C>
Balance at January 1, 1995                      $      -     $      -     $     -      $      -     $37,954
Net income                                                          -           -             -           -
12,705
Net change in parent company advances                  -            -           -             -     (15,235)
                                                --------     --------     -------      --------    --------

Balance at December 31, 1995                           -            -           -             -      35,424
Net income for the period January 1,
     1996 to October 30, 1996                          -            -           -             -      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           -
Foreign currency translation adjustment                -            -         (62)          (62)          -
                                                --------     --------      ------      --------      ------

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

Net Income                                             -        5,565           -         5,565           -
Issuance of Preferred Stock                        2,500            -           -         2,500           -
Foreign currency translation adjustment                -            -        (180)         (180)          -
                                                --------     --------     -------      --------      ------

BALANCE AT DECEMBER 31, 1997                    $ 42,520     $(88,406)    $  (293)     $(46,179)     $    -
                                                ========     ========     =======      ========      ======

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


<PAGE>
                               Unifrax Corporation

                      Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>

                                                               Year Ended December 31
                                                      1995              1996             1997
                                                      ----              ----             ----
                                                                   (In Thousands)
OPERATING ACTIVITIES
<S>                                                    <C>               <C>               <C>
Net income                                             $ 12,705          $ 11,640          $ 5,565
Adjustments to reconcile net income to cash
     provided by operating activities:
     Depreciation and amortization                        4,301             4,091            5,323
     Provision for deferred income taxes                     28               214            1,802
     Provision for pension expense                          149                52                -
     Loss on sales of property, plant
         and equipment                                       88               251               20
     Changes in operating assets and liabilities:
         Accounts receivable                              1,402             1,042            1,136
         Inventories                                        119            (2,390)           2,206
         Prepaid expenses and other current assets          (29)             (113)            (117)
         Accounts payable and accrued expenses               54             3,447           (1,942)
         Accrued postretirement benefit cost                108               311              252
         Other long term liabilities                          -                86              (78)
         Other                                                -                 -             (180)
                                                       --------          --------         --------
Cash provided by operating activities                    18,925            18,631           13,987

INVESTING ACTIVITIES
Capital expenditures                                     (3,404)           (8,267)          (9,421)
Deferred software and other costs                          (294)             (175)               -
Proceeds from sales of property, plant and
     equipment                                              105                90              145
Other investing activities                                    -              (227)               -
                                                       --------          --------         --------
Cash used in investing activities                        (3,593)           (8,579)          (9,276)

FINANCING ACTIVITIES
Cash transfers to parent company, net                   (15,393)           (7,272)               -
Borrowings under revolving loan                               -                 -           19,350
Repayments of revolving loan                                  -                 -          (16,850)
Long term borrowings                                          -           125,000                -
Repayments of long-term borrowings                            -            (4,250)          (7,750)
Increase in amounts due affiliates                            -             2,250                -
Recapitalization payment                                      -          (120,000)               -
Organization costs                                            -            (4,919)               -
                                                       --------         ---------         --------
Cash used in financing activities                       (15,393)           (9,191)          (5,250)
                                                       --------         ---------         --------
Net (decrease) increase in cash                             (61)              861             (539)
Cash--beginning of year                                      98                37              898
                                                       --------         ---------         --------
CASH--END OF YEAR                                      $     37         $     898         $    359
                                                       ========         =========         ========

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

                               Unifrax Corporation

                   Notes to Consolidated Financial Statements

                                December 31, 1997


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 Unifrax'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.  ("BPA") 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  had certain  shared  assets and  incurred  certain  common  costs which
related to both Unifrax and other Carborundum  operations.  The Company has made
certain  allocations  of assets,  liabilities  and 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.

Certain amounts for 1995 and 1996 have been  reclassified to conform to the 1997
presentation.

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 year ended  December 31, 1995 and the two month period ended February
29,  1996,  the  Company's  sales to  businesses  included  as part of this sale
amounted to $4,078,000 and $677,000, respectively.

In  connection  with this sale,  BP and SEPR  entered  into  various  agreements
regarding the ongoing  relationship  between the Unifrax and SEPR  subsequent to
the closing of the transaction.  These  agreements,  which expire March 1, 2001,
with certain  exceptions,  prohibit the Company from competing with SEPR outside
of North America. In addition,  SEPR will perform certain die cutting operations
for the  Company,  and 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 BPA. 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.

CERAMIC FIBER HEALTH STUDIES

The Company  performs ongoing employee health studies and conducts tests as part
of new  product  research  and  development.  The cost of ceramic  fiber  health
studies are expensed as incurred. Amounts charged to operations during the years
ended  December  31,  1995,  1996 and 1997  relating to the cost of these health
studies amounted to $1,329,000, $1,559,000 and $1,253,000, respectively, and are
included in administration expense in the accompanying statements of income.

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.

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.

4. INVENTORIES

Major classes of inventories are as follows:
                                     December 31
                              1996               1997
                              ----               ----
                                   (In Thousands)

Raw material and supplies       $ 1,722            $ 1,598
In-process                        1,758              1,551
Finished product                  6,041              4,410
                                -------            -------
                                  9,521              7,559
Adjustment to LIFO cost             570                326
                                -------            -------
                                $10,091            $ 7,885
                                =======            =======

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

Certain of the  Company's  products  contain  vermiculite,  which is a naturally
occurring  mineral.   The  Company  purchases  a  majority  of  its  vermiculite
requirements  from a source in China and the balance from a source in the United
States.  As a  result  of the  superior  performance  qualities  of the  Chinese
vermiculite,  the  Company  believes  that it will be reliant  upon the  Chinese
source during at least 1998 and 1999.

5.   PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

                                                      December 31
                                                 1996              1997
                                                 ----              ----
                                                     (In Thousands)

Land and land improvements                      $1,532           $1,974
Buildings                                       14,547           18,589
Machinery, equipment, furniture and fixtures    38,809           48,909
Construction in progress                         9,225            1,435
                                              --------           --------
                                                64,113            70,907
Less accumulated depreciation                  (30,174)          (33,391)
                                              --------           -------
                                              $ 33,939          $ 37,516
                                              ========          ========

For the years ended  December  31,  1995,  1996 and 1997,  depreciation  expense
amounted to $4,008,000, $3,910,000 and $4,383,000, respectively.

6. LONG TERM DEBT AND NOTE PAYABLE -- AFFILIATE

Long term debt consists of the following:
                                            December 31
                                        1996            1997
                                           (In Thousands)

10 1/2% Senior Notes due 2003      $ 100,000        $ 100,000
Loan and Security Agreement
     Term loan                        20,750          13,000
     Revolving loan                        -           2,500
                                   ---------           -----
LONG TERM DEBT                     $ 120,750        $115,500
                                   =========         =======

The  Company's  Loan  and  Security  Agreement  dated  as of  October  30,  1996
("Security  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  1.25% to LIBOR  plus  2.0%,  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,  1997,  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, 1997 was
7.68% (7.53% at December 31, 1996).  All outstanding  amounts under the Security
Agreement mature October 2001.

The Security 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 Security Agreement are secured by assets of the Company  including,  but not
limited to, accounts receivable, inventory, equipment and fixtures.

The note  payable--affiliate  accrues interest,  payable annually,  at the prime
lending  rate (8.50% at December 31, 1997;  8.25% at December  31,  1996).  This
obligation matures in October, 1999.

Maturities  of  long-term  debt  and  note  payable--affiliate  are $0 in  1998,
$10,750,000 in 1999, $9,000,000 in 2000, $2,750,000 in 2001, and $0 in 2002.

Interest  payments made in 1996 and 1997  amounted to $106,000 and  $12,417,000,
respectively.

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

At December  31, 1996 and 1997,  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.

<TABLE>
<CAPTION>

                                                          December 31
                                                 1996                      1997
                                                 ----                      ----
                                   Carrying          Fair         Carrying         Fair
                                    Amount           Value          Amount         Value
                                   --------          -----         -------         -----
                                                        (In Thousands)
Assets:
<S>                               <C>             <C>            <C>            <C>
     Cash and cash equivalents    $     898       $     898      $     359      $     359

Liabilities:
     Long-term debt (including
         current maturities)       (127,750)       (130,250)      (122,500)      (127,500)
</TABLE>

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  $1,191,000  and $168,000 for the year ended  December
31, 1995 and the two month period ended February 29, 1996, respectively.

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 $2,700,000 and $356,000
for the year ended December 31, 1995 and the two month period ended February 29,
1996, respectively.

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.  Management  estimates  the cost for  these  services  on a
stand-alone  basis would have been  approximately  $1,700,000 for the year ended
December 31, 1995.

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 year
ended  December 31, 1995 and the period from January 1, 1996 to October 30, 1996
amounted to $117,000 and $211,000,  respectively.  Management estimates the cost
for  these  insurance   categories  on  a  stand-alone  basis  would  have  been
approximately $800,000 per annum for the years ended December 31, 1995 and 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  $884,000  and
$148,000  for the year ended  December  31, 1995 and the two month  period ended
February  29,  1996,  respectively,  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 years ended December 31,
1995 and 1996 totaled $1,073,000 and $331,000, respectively.

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 and  $300,000 in 1997 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:

                                                          1996        1997
                                                          ----        ----
                                                          (In Thousands)

Accrued compensation and employee benefits             $ 2,437     $ 2,963
Ceramic fiber product stewardship and monitoring         1,098         618
Interest                                                 2,127       2,028
Other                                                    2,769       1,959
                                                        ------      ------
                                                        $8,431     $ 7,568
                                                        ======     =======


10. RETIREMENT PLANS

Prior to the Recapitalization  (see Note 1), the Company participated in defined
benefit  retirement  plans  sponsored by BPA. 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  $149,000  and  $52,000  in 1995 and  1996,  respectively.
Amounts allocated were principally determined based on payroll.

Pursuant to the  Recapitalization,  for the salary  related plan,  BPA 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 BPA 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. The net periodic pension expense for this plan for the year ended December
31, 1997 included the following (in thousands).

Service cost -- benefits earned during the period        $ 43
Interest cost on projected benefit obligation              48
Actual return on plan assets                              (49)
Net amortization and deferral                              14
                                                         ----
NET PERIODIC PENSION COST                                $ 56
                                                         ====

The  following  table sets forth the Mirror Plan's funded status at December 31,
1997 (in thousands):

Actuarial present value of accumulated benefit obligation,
   including vested benefit obligation of $658           $ 773
                                                         =====

Projected benefit obligation                             $ 773
Plan assets at fair value                                  753
                                                         -----
Projected benefit obligation in excess of plan assets      (20)
Unrecognized net gain                                      (43)
                                                         -----
ACCRUED PENSION COST                                     $ (63)
                                                          =====

The projected benefit obligation is based on a weighted-average assumed discount
rate of 7% and a  weighted-average  expected  long-term  rate of  return on plan
assets used to  determine  the  expected  return on plan assets in net  periodic
pension  cost  of  8%.   Unrecognized  gains  and  losses  are  amortized  on  a
straight-line  basis over a period  approximating  the average remaining service
period for active participants.

Also 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 in 1997 was $422,000.

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 $313,000,  $314,000 and and $428,000 during
the years ended December 31, 1995, 1996 and 1997, respectively.


11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

The Company provides certain health care and life insurance benefits for retired
employees who meet eligibility requirements.  Prior to the Recapitalization this
was done through BPA.  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 BPA
for 1995 and 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 BPA for 1995 and the ten months
ended  October  30,  1996 and the amount  charged  to expense  for the two month
period ended December 31, 1996, and the year ended December 31, 1997.

<TABLE>
<CAPTION>
                                                             Year Ended December 31
                                                     1995          1996          1997
                                                     ----          ----          ----
                                                             (In Thousands)

<S>                                                  <C>           <C>           <C>
Service cost--benefits earned                        $ 70          $115          214
Interest costs                                        265           247          134
Amortization of unrecognized net gain                   -             -           (84)
                                                     ----          ----          ----
NET PERIODIC POSTRETIREMENT BENEFIT EXPENSE          $335          $362         $264
                                                     ====          ====         ====
</TABLE>

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

                                                            December 31
                                                        1996               1997
                                                        ----               ----
                                                           (In Thousands)

Accumulated postretirement benefit obligation:
     Retirees                                         $    -             $   24
     Employees fully eligible                          1,035                662
     Other active employees                            1,151              1,582
                                                      ------             ------
                                                       2,186              2,268
Unrecognized net gain                                    771                941
                                                      ------             ------
ACCRUED POSTRETIREMENT BENEFIT COST                   $2,957             $3,209
                                                      ======             ======

Pursuant  to  the   Recapitalization,   BPA  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.

The accumulated postretirement benefit obligation is based on a weighted-average
assumed discount rate of 7.0% at December 31, 1997 and 1996 and a projected long
term compensation growth rate of 4.0% at December 31, 1997 and 1996. The assumed
annual  rate of future  increase  in per  capita  cost of health  care  benefits
(health care cost trend rate) for 1997 and beyond is 6.0% for all beneficiaries.
A one percentage point increase in the assumed
health  care cost trend  rate  would  increase  the  accumulated  postretirement
benefit obligation as of December 31, 1997 by approximately $42,000 and increase
the annual aggregate service and interest cost by approximately $8,000.

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

12. INCOME TAXES

The provision for income taxes consists of the following:

                         Year Ended December 31
                1995              1996             1997
                ----              ----             ----
                             (In Thousands)
Current:
     Federal       $6,900            $6,671           $  100
     State          1,815             1,658               35
                   ------            ------           ------
                    8,715             8,329              135
Deferred               28               214            1,802
                   ------            ------           ------
                   $8,743            $8,543           $1,937
                   ======            ======           ======

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

                                                          Year Ended December 31
                                                      1995              1996             1997
                                                      ----              ----             ----
                                                              (In Thousands)

<S>                                                 <C>               <C>             <C>
Income before income taxes at 35% for 1995 and
   1996; 34% for 1997                               $7,507            $7,064          $2,551
Permanent income tax disallowances                      51               274              66
State taxes, net of federal benefit                  1,185             1,078             291
Reduction of valuation allowance                         -                 -           (1,000)
Other                                                    -               127              29
                                                    ------            ------           -----
                                                    $8,743            $8,543          $1,937
                                                    ======            ======          ======
</TABLE>

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, 1996 and 1997, the
major components of deferred tax assets and liabilities were as follows:
                                                          December 31
                                              1996               1997
                                                   (In Thousands)
Deferred tax liabilities
     Deferred charges                           $  (172)           $  (109)

Deferred tax assets
     Tax goodwill and other intangible assets    30,321             28,344
     Property, plant and equipment                7,867              4,635
     Net operating loss carryforward              1,837              3,850
     Accrued liabilities                          1,273              1,835
     Accrued postretirement benefit cost          1,183              1,284
     Inventory                                      718                475
     Other                                          444                355
                                               --------            -------
Gross deferred tax assets                        43,643             40,778
Valuation allowance                              14,500             13,500
                                                -------            -------
Net deferred tax assets                          29,143             27,278
                                                -------            -------
NET DEFERRED TAX ASSET                          $28,971            $27,169
                                                =======            =======


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. As a result, the Company recognized a
deferred tax asset of approximately $31,266,000 (net of a valuation allowance of
approximately  $15,000,000).  Also,  as a result  of the  Recapitalization,  the
Company is  eligible  to receive a  refundable  state  investment  tax credit of
approximately $625,000.

The amounts for December 31, 1996 above have been revised from those  previously
reported,  based  upon  the  final  determination  of the  basis of  assets  and
liabilities for income tax purposes.  The amounts previously reported were based
upon  preliminary  estimates.  The  subsequent  revision  had no  impact  on the
reported net deferred tax assets.

At December  31,  1997,  the Company  has Federal and state net  operating  loss
carryforwards  totaling  approximately  $10,900,000  which will be  available to
offset future taxable income.  These net operating loss carryforwards  expire in
2011 through  2012.  The Company paid  $125,000 for income taxes during the year
ended  December  31,  1997.  During the  fourth  quarter  of 1997,  the  Company
recognized  a  benefit  of  $1,000,000   for  deferred  tax  assets   previously
unrecognized.

13. 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. In 1996,  1,075 options were granted and
were  outstanding  at December 31, 1996 and 1997.  The options were granted at a
price of $1,500 per share and vest in equal amounts over a four year period from
the grant date. The options expire ten years after grant.

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  and  $5,492,000  for the
years ended  December 31, 1996 and 1997,  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.

14. 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 for the years ended December 31, 1995,  1996 and 1997 amounted to
$1,429,000, $1,479,000 and $1,580,000, respectively.

Future minimum lease payments under all non-cancelable operating leases having a
remaining  term in excess of one year as of December 31, 1997 are as follows (in
thousands):

         1998               $ 846
         1999                 783
         2000                 774
         2001                 774
         2002                 774
         Thereafter           479
                           ------
                           $4,430



15. 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,  the results of this research
have been  inconclusive as to whether or not ceramic fiber exposure  presents an
unreasonable risk to humans.

Various legal  proceedings  and claims have been made against  manufacturers  of
ceramic  fibers,  including the Company,  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 is presently not determinable.

Consistent  with  customary  practice  among   manufacturers  of  ceramic  fiber
products,  the Company has entered  into  agreements  with  distributors  of its
product  whereby the Company has agreed to indemnify  the  distributors  against
losses  resulting from ceramic fiber claims and the costs to defend against such
claims.  The amount of any liability that might ultimately exist with respect to
these indemnities is presently not determinable.

Pursuant    to    the    Unifrax    Corporation    Recapitalization    Agreement
("Recapitalization  Agreement"),  BP America Inc. and certain of its  affiliates
(collectively  "BPA"),  has agreed to indemnify the Company against  liabilities
for personal  injury and wrongful  death  attributable  to exposure prior to the
Closing to refractory ceramic fibers manufactured by the Company. BPA 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,  BPA 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 BPA has agreed to indemnify the Company
against 100% of such losses. BPA 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 BPA 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 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.
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.

Under the terms of the Recapitalization  Agreement,  BPA 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 existing 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.

Prior to divestment, the Company owned a site in Sanborn, NY, at which extensive
remediation  activity  is  currently  being  undertaken.  The site was used by a
number of former  Carborundum  operations  other than the  Company.  Testing has
indicated that certain  contamination  is present in the soil.  Neither past nor
current  operations of the Company are believed to have contributed to, or to be
contributing   to,  the  existence  of  the   contamination.   BPA  has  assumed
responsibility for implementing  remedial  activities  specified by the State of
New York which required removal of the  contamination,  chiefly by means of soil
vapor  extraction.  Under the terms of an agreement,  BPA has taken title to and
assumed  liability for the  remediation of this property as of October 30, 1996.
Unifrax leases a portion of the present manufacturing facilities on this site.

LEGAL PROCEEDINGS

The  Company is  involved in  litigation  relating to claims  arising out of its
operations in the normal course of business, including product liability claims.
From  time to time  the  Company  has  been  named as a  defendant  in  lawsuits
involving  alleged injury  suffered from exposure to ceramic fiber.  The Company
believes that it is not presently a party to any litigation the outcome of which
would have a material  adverse  effect on its financial  condition or results of
operations.  Pursuant to the Recapitalization Agreement, BPA agreed to indemnify
the  Company,  subject to  certain  limitations,  against  all  currently  known
lawsuits  and  certain  future  lawsuits  alleging  exposure  to  ceramic  fiber
(reference is made to the information  appearing under the heading "Relationship
with BP and its  Subsidiaries"  in Item 13 of the  report  on Form  10-K for the
Unifrax  Corporation  for the year 1997 which is hereby  incorporated  herein by
reference).

Various other legal proceedings and claims have been made against the Company in
the  ordinary  course of  business.  While the amounts  could be material to the
results of operations in the period recognized,  in the opinion of management of
the Company,  the ultimate  liability,  if any, resulting from such matters will
not have a material adverse effect on the Company's financial position.

16. MAJOR CUSTOMER

The Company had sales to one customer which accounted for  approximately  11% of
net sales for 1995.  No one customer  accounted  for 10% or more of net sales in
1996 or 1997.

17. STOCKHOLDERS' EQUITY

Effective April 21, 1997, the shareholders of Unifrax Corporation  authorized an
amendment to the Certificate of Incorporation  of Unifrax  Corporation to reduce
the number of  authorized  common shares from 50,000 shares to 40,000 shares and
to  authorize  10,000  shares of  cumulative  preferred  stock  with a 6% annual
dividend.

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 $36,250 at December 31, 1997.

18. EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting  Comprehensive Income", which is effective for fiscal years beginning
after  December  15,  1997.  Statement  No.  130  establishes  new rules for the
reporting  and  display of  comprehensive  income and its  components;  however,
adoption  in  1998  will  have  no  impact  on  the   Company's  net  income  or
stockholders'  equity.  Statement  No. 130 requires the  cumulative  translation
adjustment,  which is currently reported in stockholders' equity, to be included
in other comprehensive income and the disclosure of total comprehensive  income.
If the Company  adopted  Statement No. 130 for the year ended December 31, 1997,
the total of other  comprehensive  income items, and comprehensive  income would
have been $(293,000) and $5,385,000, respectively.

In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosure about Segments of an Enterprise and Related  Information",  which is
effective for fiscal years  beginning  after December 15, 1997. The Company does
not expect that Statement No. 131 will have any material effect on its financial
statements.


<PAGE>
                                   Schedule II

                        Valuation and Qualifying Accounts

                               Unifrax Corporation
                             (Dollars In Thousands)



<TABLE>
<CAPTION>
                                                        Balance
                                                          at                        Charged to                   Balance at
                                                       Beginning    Charged to         Other                       End of
                                                       of Period      Expense        Accounts    Deductions        Period

YEAR ENDED DECEMBER 31, 1997 Deducted from asset accounts:
<S>                                                      <C>            <C>              <C>        <C>              <C>
     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
                                                         ------         ------           ---        ------           ------

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

YEAR ENDED DECEMBER 31, 1995 Deducted from asset accounts:
     Allowance for doubtful accounts                     $  490         $  149           $ -        $    1(a)        $  638
     Allowance for returns                                  847            820             -         1,386(b)           281
                                                         ------         ------           ---        ------           ------

TOTAL                                                    $1,337        $  969             $ -         $1,387         $  919
                                                         ======        ======             ===         ======         ======
</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        48      Director, President and Chief Executive Officer
Mark D. Roos            42      Vice President and Chief Financial Officer
Paul J. Viola           42      Vice President, Sales and Marketing
Kevin J. O'Gorman       47      Vice President, Operations
Paul M. Boymel          45      Vice President, Technology
Joseph J. Kuchera       40      Vice President, Human Resources
John E. Pilecki         45      Vice President, Engineering and Purchasing
James E. Cason          43      Vice President, Risk Management
Raymond A. Lancaster    52      Director
William D. Manning, Jr. 63      Director
John G. Nestor          53      Chairman of the Board
John F. Turben          62      Director
Edmund S. Wright        55      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 and Vice President of the Company from 1989 to
1993, and Vice President-Europe 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. Viola has been Vice President, Sales and Marketing of the Company since
February 1996. He 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.

     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 fibers business from 1993
to 1995 and Manager, Manufacturing for the Company from 1990 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 Manager of Human Resources  since 1988. 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  in 1976 and has served in
various engineering and manufacturing  positions,  including 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 Mineral,  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.

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 1995, 1996 and 1997 (the "named executive officers").

                           SUMMARY COMPENSATION TABLE
                                                                   Long-Term
                                                                Compensation
                                           Annual Compensation    Securities
Name and                                                          Underlying
Principal Position                       Salary       Bonus(a)       Options
------------------                       ------       --------  ------------
W.Kelly                    1997         211,268           -0-           N/A
President and              1996         168,090       $53,000        376.25
Chief Executive Officer    1995         155,514        53,000           N/A

K.O'Gorman                 1997         128,538           -0-           N/A
Vice President,            1996         120,649        30,641        161.25
Operations                 1995         115,689        30,641           N/A

P. Viola                   1997         121,248           -0-           N/A
Vice President,            1996         111,655        28,490        161.25
Sales and Marketing        1995         106,632        28,490           N/A

J. Cason                   1997         128,430           -0-           N/A
Vice President             1996         124,836        27,000         53.75
Risk Management            1995         121,200        20,000           N/A

M. Roos                    1997         112,650           -0-           N/A
Vice President             1996         106,306        22,000        107.50
Chief Financial Officer    1995         101,760        22,000         N/A

(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.


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 and no  options  were  exercised
during 1996 or 1997.

                 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                94.00/282.25                       -0-
K. O'Gorman             40.25/121.00                       -0-
P. Viola                40.25/121.00                       -0-
M. Roos                  26.75/80.75                       -0-
J. Cason                 13.25/40.50                       -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                  91.7%                    82.5%
William P. Kelly                                 5,000                   1.9%                     1.7%
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)                              14,350                   5.3%                     4.8%

</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 the directors 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  in paragraphs 1-3 of Item 1 and Note
15  of  the  financial   statements  contained  in  Item  8,  which  are  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"), B. P. America, Inc. ("BPA") has agreed
to indemnify the Company as set forth below.

     General Indemnity. The Recapitalization Agreement provides that, subject to
certain  limitations,  BPA 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.  BPA 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,
BPA 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.  BPA 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,  BPA 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 BPA has agreed to
indemnify the Company and Holding against 100% of such losses. BPA 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 BPA
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.  BPA 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,  BPA has agreed to  indemnify  the  Company and
Holding against environmental  liabilities arising from pre-closing  conditions.
The  Recapitalization  Agreement  also  provides  that BPA 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 BPA. BPA 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 SEPR

     As part of the  Saint-Gobain  Sale,  the Company  entered  into a series of
agreements  with Compagnie de Saint Gobain  ("SEPR") which are summarized  below
(collectively, the "SEPR Agreements").

     Covenant Not to Compete. Pursuant to a covenant not to compete, the Company
is prohibited from manufacturing, selling or distributing ceramic fiber products
(with the  exception  of  XPE(TM)  for  automotive  gaskets)  outside  the North
American  market or  owning an  interest  in or having an  involvement  with any
manufacturer or distributor of ceramic fibers outside that territory until March
1, 2001.

     License Agreement.  Pursuant to a License Agreement, SEPR received from the
Company a royalty-free  license (the  "License") to manufacture and sell outside
the North American market the ceramic fiber products, and their improvements and
replacements,  which were  manufactured  by the  Company in  Australia,  Brazil,
Germany,  and the United Kingdom prior to the Saint-Gobain  Sale. The Company is
precluded from granting any further license of this technology outside the North
American  market for 20 years except to an affiliate.  Until March 1, 2001, SEPR
is  obligated to pay the Company an annual  technical  fee, and the Company must
provide specific technical services,  and product improvements and replacements,
and must maintain all of its patents outside of the North American market.  SEPR
is prohibited from  manufacturing,  selling and  distributing  products in North
America which are manufactured using technology licensed by the Company to SEPR.

     Product  Distribution  Agreement.  Pursuant  to  the  Product  Distribution
Agreement,  SEPR has  been  appointed  as the  Company's  exclusive  distributor
outside the North  American  market,  for a five-year  term,  for the  Company's
product  lines which are not covered by the License,  except for XPE(TM).  These
include (i) products  manufactured  only in the North  American  market and sold
outside the North American market prior to the
Saint-Gobain  Sale ("Group I  Products");  and (ii) if SEPR is unable,  with its
equivalent  products,  to fulfill a request from a customer outside of the North
American market, (y) products manufactured only in the North American market and
not sold outside the North American market prior to the Saint-Gobain Sale or (z)
products  developed  by the  Company  after the  Saint-Gobain  Sale  ("Group  II
Products").

     For Group I Products, minimum purchase quantities and distributor discounts
are to be agreed upon annually on a product-by-product  basis by the Company and
SEPR.  Failure to agree on sales  quantities  or discounts or failure by SEPR to
purchase  the  minimum  quantities  may  lead  to  termination  of  the  Product
Distribution  Agreement on a product-by-product  basis twelve months thereafter.
For Group II Products,  SEPR receives a fixed discount from the prevailing North
American market price.

     Distribution  Product  License  Agreement.  Pursuant  to  the  Distribution
Product License  Agreement,  SEPR must distribute such products on the Company's
behalf.  SEPR is not  entitled to a license to  manufacture  any of the Group II
Products.  SEPR will be granted a royalty-bearing  manufacturing  license on any
Group I Products which are terminated from the Product  Distribution  Agreement.
SEPR also has the right to cancel the  Product  Distribution  Agreement  upon 12
months' notice on a product-by-product  basis for Group I Products by taking out
a license. Any license of Group I Products will grant rights to the then-current
patents and technology  but will not include any rights to license  improvements
developed by the Company after the product has been  terminated from the Product
Distribution  Agreement.  Any license for Group I Products  will require SEPR to
pay a royalty on a declining scale until March 1, 2006,  after which the license
becomes royalty-free.  The Company is obligated to supply technical services, to
be charged at a per diem rate, until February 28, 2002.

     Conversion  Agreement.  Pursuant to the Conversion  Agreement,  SEPR has an
obligation to die-cut  rolls of XPE(TM) for the Company in  connection  with the
Company's  sales to  customers  within  Europe  and South  America  and has been
granted a right of first refusal to provide this service to the company in other
countries  outside the North American market.  These rights and obligations will
continue until the earlier of a cancellation of this  arrangement by SEPR or the
expiration of certain patents covering XPE(TM).

     XPE(TM) License Agreement.  Pursuant to the XPE(TM) License Agreement, SEPR
may cancel the  Conversion  Agreement  upon six months'  notice and take up to a
20-year royalty-free license to manufacture XPE(TM). The Company may continue to
sell  XPE(TM)  outside  of the North  American  market  during  the term of such
license.  In such event, the Company will be precluded from granting any further
license of this  technology  outside of the North  American  market for 20 years
except to an affiliate.  The Company is obligated to supply, at a per diem rate,
technical  services  for a period of three  years  from the date of grant of the
license.  The technology to be  transferred  will be that current at the date of
grant of the license but with no rights to improvements thereafter.

     Trademark   License  and  Consent   Agreement.   Under  the  terms  of  the
Saint-Gobain  Sale, the name  "Carborundum"  and the Carborundum logo became the
property of SEPR,  with the Company having the right to continue to use the name
and logo  until  March 1,  1997  while  exhausting  the  existing  inventory  of
literature and packaging  material.  The ownership of product trademarks such as
Fiberfrax(R)ceramic  fiber, remains with the Company.  Until March 1, 2001, SEPR
has the right to use the Company's product  trademarks  royalty-free  outside of
the North American market for products manufactured under the License Agreement.
After March 1, 2001, SEPR will have no further right in such product  trademarks
and sole use thereof will revert to the Company.

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, 1996 and 1997, and for the three years
       in the period ended December 31, 1997.                             13

(2)    FINANCIAL STATEMENT SCHEDULE

       II - Valuation and Qualifying Accounts                             31

       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*       Unifrax Corporation Recapitalization Agreement

       3.1*       Certificate of Incorporation of the Registrant

       3.2        Consent of Stockholders for Amendment of Certificate of
                  Incorporation
       3.3        Certificate of Amendment to Certificate of Incorporation

       3.4*       By-laws of the Registrant

       4.1*       Form of Indenture (including form of Note)

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

       10.2       First Amendment to Loan and Security Agreement

       10.3*      1996 Stock Option Plan

       10.4**     Unifrax Corporation Noncompetition Agreement

       10.5*      Lease relating to Tonawanda plant

       10.6*      Lease relating to Amherst plant

       10.7*      Sanborn Lease

       10.8*      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)

       10.9*      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)

       10.10*     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)

       10.11*     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*     Trademark License and Consent Agreement between the Unifrax
                  Corporation and Societe Europeenne des Produits Refractaires

       10.13*     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)

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

       10.15*     Form of Covenant Not to Compete between Holding and BP

       10.16*     Form of Stockholders Agreement among the Company, BPX and
                  Holding

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

       10.18      Stock Purchase Agreement dated September 30, 1997, between the
                  Company and  Holding

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

       10.20*     Tax Sharing Agreement between the Company and Holding

       10.21*     Advisory Services Agreement between the Company and Kirtland
                  Capital Corporation

       10.22*     Form of BP Note

       12.1       Computation of Ratio of Earnings to Fixed Charges

       21.1       Subsidiaries of the Registrant

       27.1       Financial Data Schedule

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

**   Incorporated  by  reference  to the  exhibits  filed with Form 10-K for the
     fiscal year ended December 31, 1996 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 _____, 1998.

                                                 UNIFRAX CORPORATION.

                                                 By:
                                                 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
  William P. Kelly         Director, President and Chief       March ____, 1998
                           Executive Officer (Principle
                           Executive Officer)


  /s/Mark D. Roos
  Mark D. Roos             Vice President & Chief              March ____, 1998
                           Financial Officer (Principal
                           Financial Officer and Principal
                           Accounting Officer)

  /s/John G. Nestor
  John G. Nestor           Chairman of the Board               March ____, 1998


  /s/Raymond A. Lancaster
  Raymond A. Lancaster     Director                            March ____, 1998



  William D. Manning, Jr.  Director                            March ____, 1998


  /s/John F. Turben
  John F. Turben           Director                            March ____, 1998

  /s/Edmund S. Wright
  Edmund S. Wright         Director                            March ____, 1998