SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K


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

For the Fiscal Year Ended June 30, 1998

OR

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

     For the transition period from ___________ to ___________

     Commission File No. 000-8027

                         EASTCO INDUSTRIAL SAFETY CORP.
                 (Name of small business issuer in its charter)

    NEW YORK                         3842                        11-1874010
(State or other                (Primary Standard              (I.R.S. Employer
jurisdiction of            Industrial Classification           Identification
incorporation or                  Code Number)                      Number)
organization)

       130 West 10th Street, Huntington Station, New York         11746
        (Address of principal executive offices)               (Zip Code)

Registrant's telephone number, including area code (516) 427-1802

Securities registered pursuant to Section 12 (b) of the Act:

                                                          Name of Each Exchange
Title of Class                                            on Which Registered
--------------                                            ---------------------

a) $.12 par value common stock ("Common Stock")           Boston Stock Exchange

b) Class B Redeemable common stock purchase               Boston Stock Exchange
   warrant ("Class B Warrant")

Securities registered pursuant to Section 12 (g) of the Act:

a) $.12 par value common stock ("Common Stock")

b) Class A Redeemable Common Stock Purchase Warrant ("Class A Warrant")

c) Class B Redeemable Common Stock Purchase Warrant ("Class B Warrant")

Check whether the registrant  (1) has filed all reports  required to be filed by
Section 13 or 15 (d) of the  Exchange  Act of 1934 during the  preceding  twelve
(12) months (or for such shorter period that the registrant was required to file
such reports),  and (2) has been subject to the filing requirements for the past
ninety (90) days.

                         YES   X                NO
                              ---                  ---
<PAGE>

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405
of 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}

State registrant's revenues for its most recent fiscal year.  $34,339,038.

The  aggregate  market value of the common stock held by  non-affiliates  of the
registrant as of September 17, 1998 was approximately $1,930,000. Non-affiliates
include all  shareholders  other than  officers,  directors and 5%  shareholders
known to registrant. Market value is based upon the price of the common stock of
the registrant as of the close of business on September 17, 1998 which was $1.44
per share as reported by NASDAQ.

As of September 17, 1998,  the number of shares  outstanding of the common stock
of the registrant was 1,683,079  shares.  The number of shares has been adjusted
for prior stock splits and estimated rounding for fractional shares.

                       DOCUMENTS INCORPORATED BY REFERENCE

Part III  which  includes  Item 10  (Directors  and  Executive  Officers  of the
Registrant),  Item 11 (Executive  Compensation),  Item 12 (Security Ownership of
Certain Beneficial Owners and Management) and Item 13 (Certain Relationships and
Related  Transactions)  will be incorporated in the registrant's proxy statement
to be filed within 120 days of June 30, 1998 and are incorporated herein by
reference thereto.

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<PAGE>


                                     PART I

Item 1.  DESCRIPTION OF BUSINESS

     (a) General Development of Business.

     Eastco  Industrial Safety Corp.  (referred to herein as the "Company",  the
"Registrant"  or "Eastco"),  is a corporation  organized and existing  under the
laws of the State of New York, having been incorporated on May 15, 1958.

     The Company, through its wholly-owned subsidiaries, Disposable Safety Wear,
Inc.   ("Disposable"),   Safety  Wear  Corp.   ("Safety  Wear"),   Eastco  Glove
Technologies,   Inc.   ("Glove   Technologies"),Puerto   Rico  Safety  Equipment
Corporation  ("Puerto  Rico Safety  Equipment"),  and Puerto  Rico Safety  Corp.
("Puerto Rico Safety"), manufactures industrial protective clothing products and
distributes  a  wide  range  of  industrial   safety  products.   The  Company's
Manufacturing  Operations  sells its  products to  distributors.  The  Company's
Distribution  Operations sells products to "end users," including  manufacturing
companies and service businesses,  public utilities,  fisheries,  pharmaceutical
plants, the transportation industry and companies engaged in hazardous materials
abatement. Use of products sold by the Company has in a large part resulted from
the  adoption of OSHA  standards  and the  awareness of industry and the general
public  for the need to  remove  hazardous  materials  contained  in  industrial
facilities, schools and buildings.

     During fiscal 1997, the Company began to focus more on the sale of products
manufactured by it in its manufacturing segment.

     In April, 1997, the Company acquired a business (Glove  Technologies) based
in  Minnesota  which  manufactures  protective  knit gloves which are being sold
nationally through the Company's distributors.

     During  fiscal  year  1997,  the  Company  commenced  the  use of  separate
contracted  production  facilities in Mexico to sew materials already cut by the
Company. The use of these subcontractors results in reduced production costs.

     In March 1997, Lawrence Densen became President and Chief Executive Officer
of  the  Company.   Arthur  Wasserspring  became  Chief  Financial  Officer  and
Vice-President   of  Finance,   and  Richard  Boyen  became   Vice-President  of
Manufacturing on February 1, 1997.


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<PAGE>

     (b) Financial Information About Industry Segments.

     The financial information about the Company's business segments for each of
its last three  fiscal  years  ended June 30, 1998 is included in Note 10 of the
Notes to the Consolidated  Financial Statements and is incorporated by reference
thereto.

     (c) Description of Business.

     Manufacturing Operations

(i) Manufactured  products are sold under the  "Charkate/Worksafe",  "Charkate",
"Worksafe" and "COVER-UP" trade names. The Company,  through Disposable,  Safety
Wear and Puerto Rico Safety Equipment,  manufactures limited use (in prior years
referred to as disposable) and reusable industrial  protective apparel.  Limited
use protective  products include  coveralls,  shirts,  pants,  headwear,  hoods,
aprons, smocks, lab coats, hazardous material handler suits,  examination gowns,
sleeves,  shoe covers and  related  items.  Limited use  clothing is designed to
protect the user from,  among  other  things,  splash,  dirt  contamination  and
against a wide range of substances.  Limited use clothing is made primarily of a
spun bonded polyolefin  produced solely by DuPont under the trade name Tyvek(R).
Reusable industrial  protective clothing consists of items for the protection of
various  parts of the body which are  designed  to shield  the user from,  among
other things,  splash,  dirt,  contamination,  heat,  fire, cold and the outside
environment.  Specific products  manufactured include coveralls,  gloves, mitts,
shirts, thermal underwear,  sleeves, coats, pants, leggings, spats, bibs, safety
vests and a variety of other kinds of protective clothing and uniforms.

     Pursuant  to  the   acquisition   during  April,   1997,  the  Company  now
manufactures  protective knit gloves and sleeves which are sold by the Company's
Charkate  Worksafe/Knit  Glove  Division.  These  products are generally made of
cotton and cotton polyester,  composite high tensile cut resistant yarns, Kevlar
(R) Brand aramid fibers,  as well as steel,  stainless  steel and other high cut
resistant composite fibers. The products may have special coating and in general
are  used to  protect  the user  from  cuts  and  abrasions,  and can be used in
industries  involving such items as meat packing,  glass handling,  sheet metal,
and automotive protection.

     Sales of manufactured limited use clothing and related limited use products
accounted  for  approximately  54%,  45% and 43% of the  Company's  consolidated
revenues for the three fiscal years ended June 30, 1998, respectively.

     The Company's  Manufacturing  Operations  and  warehousing  facilities  are
located in Puerto Rico,  Minnesota and Alabama.  The Company also has contracted
production facilities in Mexico to sew materials already cut by the Company. The
Company's  Manufacturing  Operations are directed primarily from Alabama and its
sales are directed from New York.  The Company's  products are sold primarily in
the United States and Puerto Rico. The Company sells its  manufactured  products
through independent  distributors.  In addition,  manufactured products are sold
through the Company's Distribution  Operations in the northeastern region of the
United States and Puerto Rico.

     The   Company   utilizes   catalogs,    telemarketing   and   its   website
(www.eastco.com)  to aid in its sales  efforts,  although  the Company  does not
engage in any mail order business.  Sales are primarily to distributors who sell
to "end users" comprised of industrial,  commercial and  governmental  accounts.
The  Company  considers  industrial  accounts to be those  businesses  which are
primarily based upon manufacturing and production, while commercial accounts are


                                       4
<PAGE>

considered  by the Company to be service  businesses.  The Company also believes
that standards established by OSHA have resulted in a need by others to purchase
the Company's  products.  Sales are also promoted through trade shows,  mailings
and advertising in trade magazines and directories.

(ii) The Company has made no public  announcement of, or made public information
about,  any new product in this segment which would require the  investment of a
material amount of the Company's  assets or which  otherwise is material,  other
than with respect to its aforementioned acquisition described above in Item 1(a)
and in the  Company's  10QSB for the period ended March 31, 1997,  Part II, Item
V(d) which is incorporated by reference herein.

(iii) The Company is not  dependent  upon any one company for a source of supply
of raw  materials  for its  manufacturing  operations  other than  DuPont  which
supplies  the  Company  with  Tyvek(R),  which is used in  various  lines of its
limited use products.  Products  utilizing  Tyvek(R) accounted for approximately
52%, 44% and 41% of consolidated sales for the three fiscal years ended June 30,
1998,  respectively.  Management  believes  that its current  relationship  with
DuPont is  satisfactory.  Loss of DuPont as a supplier of Tyvek (R) would have a
material adverse effect on the Company's Operations.

(iv) Puerto Rico Safety Equipment is engaged in manufacturing in Puerto Rico and
was  granted  an  exemption  for  seventeen  (17) years  under the  Puerto  Rico
Industrial Tax Exemption Act of 1963 (the  "Industrial Tax Act") with respect to
Puerto Rico income  taxes on the  production  of such items as safety  clothing,
protective  sleeves,  coats,  pants, hoods and jackets for the period commencing
January 1, 1970.  On July 1, 1989 Puerto Rico  Safety  Equipment  was granted an
extension of its exemption and has a 90% exemption from Puerto Rico income taxes
for the ten-year period ending on June 30, 1999. During this period, Puerto Rico
Safety  Equipment has a 75% exemption  from Puerto Rico  municipal  taxes on its
real and personal property utilized in its operations.

     Disposable has been granted a fifteen-year  exemption  under the Industrial
Tax Act with respect to Puerto Rico income taxes on its operations  covering the
production  of limited use clothing and with respect to the property used in its
operations for the period  commencing June 4, 1977,  subject to the terms of the
grant.  This  exemption has been extended  until June 30, 2006 on the basis of a
90% exemption on Puerto Rico income taxes and a 60% exemption on municipal taxes
on its real and personal property.

     As Puerto Rico tax  exemptions  are  reduced or expire,  the Company may be
required to pay taxes on income earned in Puerto Rico.  The Company is unable to
predict the amount of such impact after such exemptions are reduced or expire.

     Puerto Rico Safety  Equipment and Disposable  have elected to apply Section
936 of the Internal  Revenue Code,  effective  July 1, 1979.  The  provisions of
Section 936 are effective until revoked by the Company. If the


                                       5
<PAGE>

conditions of Section 936(a)(2) are satisfied, the Section 936 credit equals the
portion of the United States income tax that is  attributable  to taxable income
from sources  outside the United  States  derived  from the active  conduct of a
trade or business within a United States possession,  or the sale or exchange of
substantially  all  of  the  qualified   possession  source  investment  income.
Dividends payable by each subsidiary to the Company from operations are entitled
to a 100% dividends  received deduction but are subject to a 10% withholding tax
in Puerto Rico.  The Omnibus  Budget  Reconciliation  Act of 1993 (the  "Omnibus
Act")  imposed new  limitations  on computing  the  Possession  Tax Credit under
Section 936 for tax years  beginning after 1993. The Company made an election in
1995 which reduced the credit to 60% of the 1994 level and which further  phases
out the credit by 5% in each subsequent year to a maximum credit of 40% in 1998.
Since the credit is a function of future  earnings,  if any,  the effect of such
limitations  cannot be determined at the present time. In addition,  the Omnibus
Act makes the 100%  dividends  received  deduction  subject  to the  Alternative
Minimum Tax  Calculation.  The Small Business Job Protection Act of 1996 further
limits the Possession tax credit for years  beginning after 2001 with the credit
being  eliminated  for tax years  beginning  after 2005. No dividends  have been
declared on the aggregate undistributed earnings of Puerto Rico Safety Equipment
and  Disposable   (which  through  June  30,  1998,   aggregates   approximately
$1,187,000)  and none are  intended  to be declared  because it is  management's
intention to reinvest the earnings, if any, from such subsidiaries indefinitely.
The Company  believes that based upon current  operations,  the Omnibus Act will
not have a material effect on the Company for the foreseeable future.

     The Company is a party to a Garment Manufacturer & Seller License Agreement
with DuPont,  pursuant to which DuPont provides the Company with nonwoven fabric
under its  trademark.  This  Agreement may be terminated by either party for any
reason with 120 days notice.

(v) The Company does not consider this segment of its business to be seasonal.

(vi)  The  Company  is  required  to  maintain   substantial   inventories  (see
Consolidated  Financial  Statements)  for  this  segment  in  order  to meet the
immediate  shipping  requirements of its customers who require products on short
notice and who do not maintain an inventory of same.  The Company  believes that
other companies in this industry also maintain substantial inventories.

(vii) This segment of the Company is not dependent  upon any single  customer or
any few  customers,  the loss of any one or more of whom  would  have an adverse
effect on the business of the Company.  No one company or customer  accounts for
more than 10% of the Company's consolidated revenues.

(viii) The dollar amount of backlog of orders  estimated and believed to be firm
for this  segment as of June 30,  1998 was  approximately  $972,000  compared to
approximately  $1,828,000 as of June 30, 1997. All of the backlog as of June 30,
1998 is expected to be filled  during the current  fiscal  year.  The  Company's
backlog has been reduced because of its ability to increase production capacity


                                       6
<PAGE>

thereby allowing it to be more current on its shipments.

(ix) No material  portion of the  business  of the  Company for this  segment is
subject to  renegotiation of profits or termination of contracts or subcontracts
at the election of the government.

(x) The Company  faces  competition  in all of its product  markets from larger,
established  companies  that  have  greater  financial,  managerial,  sales  and
technical  resources  than the Company,  and certain  markets for the  Company's
products are dominated by such larger companies. While larger competitors may be
able to benefit  from  economies of scale and to  introduce  new  products  that
compete with the Company's products,  management of the Company is accustomed to
such competition, and believes the Company will remain competitive in this group
of companies.  The Company's  major  competitors  in price and in service in its
Manufacturing  Operations  are Kappler Inc. and Lakeland  Industries,  Inc.,  in
limited use clothing  sales,  and Red Kap, a subsidiary of VF  Industries  Inc.,
Topps Mfg.  Co.  and  Workrite  Uniform  Co. in the sale of  reusable  clothing.
Primary competitors in the manufacture of gloves are Chicago Protective Apparel,
Inc., Steel Grip, Inc., and Golden Needles Ansell, Inc.

(xi) The Company, during the last three fiscal years, has not spent any material
amount on  research  and  development  relating to the  development  or research
activities  of new  products,  services  or  techniques  or the  improvement  of
existing products, services or techniques.

(xii) Compliance with Federal, State and local environmental laws is expected to
have no material effect upon capital expenditures,  earnings and the competitive
position of the Company. The Company's  manufacturing  facilities are subject to
regulation and inspection  standards  established by OSHA.  Such facilities have
not yet been inspected for compliance with OSHA.  Although the Company  believes
it is in material compliance with required standards,  there can be no assurance
that any  inspection  will not reveal that the Company has failed to comply with
OSHA and that,  as a result,  the Company may be required to expend sums,  which
can be costly, to assure compliance with OSHA regulations.

(xiii) The total number of employees  employed by the  Registrant as of June 30,
1998 was approximately 261 for both segments.

     Distribution Operations

(i)  The  Company,  primarily  through  Eastco,  distributes  industrial  safety
products manufactured by third parties.  Products distributed include hard hats,
protective  clothing,  gloves,  glasses,  ear  muffs,  ear  plugs,  respirators,
goggles, face shields, rainwear, protective footwear, first-aid kits, monitoring
devices,  signs and related  products.  These  products are sold to industry and
service businesses,  including utilities, hospitals,  pharmaceutical plants, and
companies engaged in hazardous materials abatement.

     The Company supplies a variety of items which may be used during the


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<PAGE>

removal  and/or  encapsulation  of  hazardous  materials  in  office  buildings,
chemical plants,  refineries,  power-generating  plants,  schools and hospitals.
Abatement  products  sold by the  Company  largely  include  items made by other
companies, such as negative air machines, respirators, air filtration equipment,
vacuums,  polybags and sheetings,  decontamination showers, signs, tools, pumps,
sprayers  and related  equipment.  The Company does not engage in the removal or
encapsulation  of hazardous  materials.  Sales of these  products  accounted for
approximately  12%, 13% and 20% of the Company's  consolidated  revenues for the
three fiscal years ended June 30, 1998, respectively.  The foregoing percentages
do not include  products used in the abatement  field which are  manufactured by
the Company.

     The  Company's  Distribution  Operations  are  primarily  directed from the
Company's  offices in New York. The Company also has facilities for  warehousing
and distribution of its  non-manufactured  products in Puerto Rico,  Connecticut
and Florida.  The Company  sells a variety of safety  products  including  those
manufactured by 3M/Racal Health,  Ansel/Edmont and Dalloz. Items distributed are
sold primarily in the northeastern region of the United States.

     The Company employs full-time  salespersons in its Distribution  Operations
who sell  products  distributed  by the Company,  and on a more  limited  basis,
products   manufactured   by  the  Company.   The  Company  uses   catalogs  and
telemarketing,  and its  website  (www.eastco.com)  in its  sales  efforts.  The
Company does not engage in any mail order business,  nor sell on a retail basis.
Sales are primarily to industrial, commercial and governmental accounts.

(ii) The Company has made no public  announcement of, or made public information
about,  any new product in this segment which would require the  investment of a
material amount of the Company's assets or which otherwise is material.

(iii) The Company serves as a distributor for various firms but is not dependent
upon any one company for which it acts as a distributor.

(iv) Patents, trademarks,  licenses, franchises and concessions are not material
to this segment.

(v) The Company does not consider this segment of its business to be seasonal.

(vi)  The  Company  is  required  to  maintain   substantial   inventories  (see
Consolidated  Financial  Statements)  for  this  segment  in  order  to meet the
immediate  shipping  requirements of its customers who require products on short
notice and who do not maintain an inventory of same.  The Company  believes that
other companies in this industry also maintain substantial inventories.

(vii) This segment of the Company is not dependent  upon any single  customer or
any few  customers,  the loss of any one or more of whom  would  have an adverse
effect on the business of the Company. No one company or customer


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<PAGE>

accounts for more than 10% of the Company's consolidated revenues.

(viii) The dollar amount of backlog of orders  estimated and believed to be firm
for the  segment as of June 30,  1998 was  approximately  $276,000  compared  to
approximately  $319,000 as of June 30,  1997.  All of the backlog as of June 30,
1998 is expected to be filled during the current fiscal year.

(ix) No material  portion of the  business  of the  Company for this  segment is
subject to  renegotiation of profits or termination of contracts or subcontracts
at the election of the government.

(x) The Company  faces  competition  in all of its product  markets from larger,
established  companies  that  have  greater  financial,  managerial,  sales  and
technical  resources  than the Company,  and certain  markets for the  Company's
products are dominated by such larger companies. While larger competitors may be
able to benefit  from  economies of scale and to  introduce  new  products  that
compete with the Company's products,  management of the Company is accustomed to
such competition, and believes the Company will remain competitive in this group
of companies.  The Company's  major  competitors  in price and in service in its
Distribution Operations are Balco Industries,  Inc. and Freemont Safety Corp. in
industrial sales, and Insulation  Distributions Company,  Industrial Productions
Company and Aramsco Company in abatement sales.

(xi) The Company, during the last three fiscal years, has not spent any material
amount on  research  and  development  relating to the  development  or research
activities  of new  products,  services  or  techniques  or the  improvement  of
existing products, services or techniques.

(xii)  Compliance  with  Federal,  State  and local  environmental  laws in this
segment is expected to have no material  effect upon capital  expenditures,  and
the competitive position of the Company.

(xiii) The total number of employees  employed by the  Registrant as of June 30,
1998 was approximately 261 for both segments.

     (d)  Financial Information About Foreign and Domestic Operations and Export
          Sales.

     All sales of the  Company's  products are  primarily to the United  States,
inclusive of Puerto Rico.



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<PAGE>

Item 2.  DESCRIPTION OF PROPERTY

     The following properties are material to the business of the Company:

     The  executive  offices of the Company are located at 130 West 10th Street,
Huntington  Station,  New York and are  owned by the  Company  (the  "Huntington
Property").   The  Huntington   Property  is  also  used  for   warehousing  and
distributing  and contains  approximately  25,000 square feet of warehouse space
and 5,000  square feet of office  space.  At June 30, 1998,  the  premises  were
subject to a first real estate  mortgage made in 1992,  payable to 130 West 10th
Street Associates,  LLC  ("Associates") in the amount of $404,985.  The wives of
Messrs. Alan Densen and Anthony Towell,  executive officers and directors of the
Company and Charles Holzberg, a director, are members of Associates.

     The Company's wholly-owned subsidiary, Disposable, leases a building, which
is used for  manufacturing and warehousing,  consisting of approximately  45,000
square  feet  in  Aguadilla,   Puerto  Rico  from  the  Puerto  Rico  Industrial
Development Company. A lease was entered into for these premises on February 21,
1995,  effective for the ten year period commencing  September 1, 1993. Rent for
the twelve  month  period  ending  August 31,  1998 was at the  monthly  rate of
$8,570, which escalates to $13,041 in the final year of the lease.

     The Company's wholly-owned subsidiary,  Safety Wear, occupies approximately
40,000  square feet in Decatur,  Alabama.  The  premises  are  utilized  for the
cutting and warehousing of coveralls and other limited use products. The Company
pays $8,450 rent per month on a  month-to-month  basis.  Should these facilities
not be available to the Company, the Company believes that alternative sites are
readily available at a comparative cost.



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<PAGE>

Item 3.   LEGAL PROCEEDINGS

     The Company, in the past, used asbestos in the manufacture of its products.
Such use was  terminated by the Company in the  mid-1980's.  It has been alleged
that asbestos is a cause of cancer, asbestosis,  mesothelioma, and other related
diseases,  the symptoms of which may not appear for twenty or more years.  Since
the early 1980's,  numerous lawsuits have been instituted against the Company by
persons who have been  exposed to asbestos  and  asbestos  products.  Such legal
proceedings, for the most part, are covered by the Company's insurance policies.

     As  of  June  30,  1998,  the  Company  estimates  that  it is a  party  to
approximately  1,100  cases  with  respect to  exposure  to  asbestos  involving
approximately 3,000 plaintiffs, of which 800 cases pertain to Puerto Rico Safety
Equipment,  involving  approximately  2,000  plaintiffs.  Reference  is  made to
Exhibit 99.05 for a schedule of the known pending  actions  against the Company,
as of June 30, 1998, that have not been settled or dismissed.

     All of the  actions  against  the  Company  to date  have been  brought  by
non-employees  of the Company and are based upon  personal  injury  claims.  The
pending actions are in the Supreme Court of the State of New York, County of New
York;  Superior Court of New Jersey,  Middlesex  County,  Law Division;  and the
Court of Common Pleas of Luzerne  County,  Trial Division of  Pennsylvania.  The
number of first-party plaintiffs include, in various instances,  spouses of said
plaintiffs.  The actions,  with the exception of one pending  action,  involve a
multitude of defendants. The complaints allege exposure to asbestos and asbestos
products over various  periods of time.  Each seeks varying  amounts of damages,
usually unlimited, or for each plaintiff as high as $10,000,000 for compensatory
damages and $20,000,000 for punitive damages.  The Company may become a party to
additional asbestos actions in the future.

     From 1981 through June 30, 1998, the Company  estimates that  approximately
1,700 actions on behalf of approximately 10,000 first-party plaintiffs have been
instituted against it concerning  asbestos-related claims and that approximately
650  actions  and  the  claims  of  approximately  7,000  plaintiffs  have  been
terminated  against the  Company.  During  fiscal  1998,  the Company  estimates
approximately  800  actions  on  behalf  of  approximately   2,000  first  party
plaintiffs were instituted  against it and  approximately 33 cases involving 700
plaintiffs  were  settled or  discontinued  against  the  Company.  The  Company
estimates that as of June 30, 1998, with the exception of defense costs, a total
of approximately  $1,800,000 has been paid, or agreed to be paid, in settlements
to date with regard to the  terminated  actions  (inclusive  of actions  against
Puerto Rico Safety  Equipment) of which all but  approximately  $35,000 has been
paid by the Company's  insurance carriers.  In addition,  a number of cases have
been submitted directly to the Company's insurance carriers and settled directly
by them.  The  foregoing is based upon  information  available to the Company to
date.  Through June 30,  1998,  the Company has paid less than $37,000 for legal
and defense costs to counsel  appointed by the insurance  carriers to defend it.
Past results of settlements and defense costs are not necessarily  indicative of
future settlements and defense costs, which the Company is unable to predict.

     The  Company  believes  that it  maintained  various  policies  of  primary
insurance  in different  amounts  which will  protect it against  liability  for
asbestos-made,  product-related  personal injuries for the periods April 1, 1968
to April 1, 1969 and March 11, 1971 to November 27, 1985.  The policies range in
amounts from $50,000 to $1,000,000.  The Company also believes that since August
10, 1972 to on or about August 11, 1986, it has had various  policies for excess
coverage  applicable to asbestos  claims.  These  policies range in amounts from
$500,000 to $10,000,000 for excess coverage. There are gaps of approximately six
weeks in the primary  coverage  between  March 11, 1971 to November 27, 1985 and
approximately  thirty-six  months in the excess coverage between August 10, 1972
and August 11, 1986, and an additional  period of approximately  thirteen months
for excess coverage insurance  companies in liquidation where there is likely to
be no coverage.  Reference is made to Exhibits 99.06 and 99.07 for a schedule of
the  foregoing  insurance  policies.  The  policies  of  insurance  set forth on
Exhibits  99.06 and 99.07 are not applicable to all of the  subsidiaries  of the
Company, which have varying


                                       11
<PAGE>

coverage,  and such  subsidiaries may also be without coverage for various times
of their doing business.  Not all of these policies are in the possession of the
Company.

     During  fiscal 1994,  the Company  reached a settlement  pertaining  to all
pending and future cases against  Eastco in the State of New York brought by one
firm of  plaintiffs'  attorneys.  The  settlement  does not apply to Puerto Rico
Safety  Equipment  and is only  applicable to cases brought by the same law firm
against  the Company in the State of New York.  The  Company is to be  dismissed
without any payment in cases not  involving  any exposure to a power  generating
station  in the  State of New York  ("Powerhouse").  Where  there is  Powerhouse
exposure, a payment of $100 is to be made for each alleged nonmalignant case and
$300 for each malignant case. Where plaintiffs  consist of two spouses,  such is
deemed one case.  Payment is to await  appropriate  documentation  of  exposure,
releases from the plaintiffs  and the agreement of each plaintiff  whose case is
settled.  A copy of the letters  between counsel for the Company and counsel for
plaintiffs'  attorneys  setting  forth this  settlement is designated as Exhibit
99.11.

     An agreement between the Company and its primary  insurance  carriers dated
March 26, 1990 became effective June 26, 1990 (the "Indemnity  Agreement").  The
Company   entered  into  the  Indemnity   Agreement  in  an  effort  to  resolve
uncertainties  as to its insurance  coverage  which will cover  asbestos  claims
against the parent  company where any exposure to asbestos is alleged during the
period 1971 to 1985, inclusive. Pursuant to the Indemnity Agreement, the Company
is obligated to share in the payment of asbestos-related  claims against Eastco.
Pursuant to the Indemnity Agreement,  the Company is obligated to pay 12% of all
attorneys' fees incurred on its behalf and 17% of indemnity costs (which include
judgment and settlement  amounts).  The balance of these costs are to be paid by
the insurance carriers which are party to the Indemnity Agreement. The Indemnity
Agreement is subject to the policy limitations of each insurance policy, and may
be  terminated  at any time upon ninety (90) days notice by any of the  parties,
provided that  termination  may not be effective as to any asbestos  action that
has already been placed on the trial  calendar,  unless it has a scheduled trial
date more than twelve (12)  months  from the date the notice of  termination  is
given. The Company is presently aware of approximately fifteen (15) cases on the
trial  calendar.  A copy of the  Indemnity  Agreement  dated  March 26,  1990 is
designated as Exhibit 99.09.

     Effective during May, 1991, the Company entered into a Settlement Agreement
and  Release  with  Mount  Vernon  Fire  Insurance  Company.  Pursuant  to  this
Settlement   Agreement,   which  is  designated   Exhibit  99.10,   the  Company
discontinued  its action against Mount Vernon,  which provided that,  subject to
the terms of the Settlement Agreement,  Mount Vernon would reimburse the Company
(where  applicable)  for 6.25% of  attorneys'  fees (52.08% of the Company's 12%
share  referred to in the  Indemnity  Agreement in the previous  paragraph)  and
6.25% of indemnification costs (36.76% of the Company's 17% share referred to in
the Indemnity Agreement in the previous paragraph).  The Settlement Agreement is
not applicable to any asbestos actions against the Company where no exposure


                                       12
<PAGE>

is alleged to products  manufactured  or  distributed by Eastco between April 1,
1968 and April 1, 1969. The  Settlement  Agreement may be terminated at any time
upon 90 days  notice,  but such notice is not  applicable  to  asbestos  actions
placed on a trial  calendar,  unless such has a trial date more than twelve (12)
months  from the  date the  notice  of  termination  is  given.  The  Settlement
Agreement  provides that the limit  available  under the policy is $100,000 plus
attorneys'  fees while the  Settlement  Agreement is in effect and is applicable
only to the parent company.  Approximately  $28,000 has been reimbursed by Mount
Vernon Fire Insurance Company as of June 30, 1998 for indemnification.

     The Company is unable to ascertain the total extent of insurance applicable
to asbestos claims against it or the extent to which its insurance carriers will
provide coverage.  The two agreements  referred to above between the Company and
the insurance  carriers may not be  applicable to Puerto Rico Safety  Equipment,
which is covered by other insurance.  To date, the claims settled by Puerto Rico
Safety  Equipment  have been paid in full by insurance.  A schedule of insurance
believed to be applicable to Puerto Rico Safety Equipment is designated  Exhibit
99.08. No agreement has been reached with the insurance companies confirming all
of these  policies,  which range from $100,000 to $500,000 for primary  coverage
and $1,000,000 to $5,000,000 for excess  coverage.  The policies for Puerto Rico
Safety  Equipment  cover the period March 11, 1971 to July 23, 1986 with various
gaps as described on the exhibit.

     The Company's insurance may not provide coverage for punitive damages where
such damages are sought against it in pending  litigation.  Punitive damages are
allowable in addition to compensatory damages and are awarded as a punishment to
the defendant for the wrong in the particular case as well as for the protection
of the public against  similar acts, to deter the defendant from a repetition of
the  wrongful  act and to  serve  as a  warning  to  others.  Usually  a  wrong,
aggravated by an evil or wrongful motive or a willful and  intentional  misdoing
or a reckless indifference  equivalent thereto, is required for a court to award
punitive  damages.  The Company is unable to specify  whether its actions  would
give rise to punitive damages. It believes that its actions should not give rise
to punitive damages.  There,  however, can be no assurance that this will be the
case. The Company is a party to miscellaneous other litigation which the Company
believes will have no material affect against it.



                                       13
<PAGE>

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

     Not applicable.


                      EXECUTIVE OFFICERS OF THE REGISTRANT

                                                                First Elected
                             Offices and                        Officer of
Name                         Position Held                      the Company
----                         -------------                      --------------

Lawrence Densen              President and Chief                1986
                             Executive Officer

Alan E.  Densen              Senior Vice President              1958

Anthony P.  Towell           Senior Vice President              1989
                             and Secretary

Arthur Wasserspring          Vice President of                  1997
                             Finance and Chief
                             Financial Officer

Richard Boyen                Vice President of                  1997
                             Manufacturing
----------------

All of the above  executive  officers  have been elected to serve until the next
annual  meeting  of the  board of  directors  presently  anticipated  to be held
December, 1998, or until their respective successors are elected and qualified.

Alan E. Densen is the father of Lawrence Densen.


                                       14
<PAGE>

                                     PART II

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

     (a) The principal market on which the Common Stock of the Company is traded
is the NASDAQ  Small-Cap Market and its symbol is ESTO. The following chart sets
forth the high and low sales  prices as  determined  from  NASDAQ for the Common
Stock for the last two fiscal years and is adjusted for the  Company's  1-for-10
reverse stock split effective August 12,1996 (the "Reverse Split").

     The following  chart sets forth the high and low bid prices for the periods
indicated as determined from NASDAQ  quotations  reflecting  interdealer  prices
without  retail  mark-up,  mark-down  or  commission  and  may  not  necessarily
represent actual transactions:

                                  High                            Low
                              ------------                    ------------
Fiscal Year Ended June 30

     1997
     ----
First Quarter                 $ 10.00                      $ 5.63
Second Quarter                   6.25                        4.25
Third Quarter                    4.75                        3.75
Fourth Quarter                   5.31                        2.13
                                                             
     1998                                                    
     ----                                                    
First Quarter                 $  3.00                      $ 2.25
Second Quarter                   3.25                        1.63
Third Quarter                    3.44                        1.81
Fourth Quarter                   3.56                        2.38
                                                                
     (b) The  approximate  number of holders of record of the Common Stock as of
September  17, 1998 was 214. The Company  believes  there are in excess of 1,200
beneficial holders of the Common Stock.

     (c) (1) No dividends have been paid during the past two years.

     (2) The Company has no present  intention  of paying any cash  dividends in
its  foreseeable  future  and  intends  to use its net  income,  if any,  in its
operations.

     (3) The  Company  is  prohibited  from  paying  dividends  under  its  loan
agreement with Congress Financial Corporation.

     (d) During fiscal 1998 no equity  securities that were not registered under
the Securities Act of 1933, as amended were sold by the Registrant.


                                       15
<PAGE>

ITEM 6.SELECTED FINANCIAL DATA

                 EASTCO INDUSTRIAL SAFETY CORP.AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                Years Ended June 30,
                              ------------------------------------------------------
                                1998        1997        1996       1995       1994
                              --------    --------    --------   --------   --------
                                     (in thousands, except for per share data)
<S>                           <C>         <C>         <C>        <C>        <C>     
Operations
----------
Net Sales                     $ 34,339    $ 27,988    $ 26,983   $ 24,025   $ 20,746
Net Income/(Loss)                 (488)     (1,392)         10         78     (2,711)
Earnings (Loss) per Share         (.29)       (.98)        .03        .22     (20.76)
Cash Dividends per Share(1)          0           0           0          0          0

<CAPTION>
                                                     As of June 30,
                              ------------------------------------------------------
                                1998        1997        1996       1995       1994
                              --------    --------    --------   --------   --------
                                     (in thousands, except for per share data)
<S>                           <C>         <C>         <C>        <C>        <C>     
Financial Condition
-------------------
Total Assets                  $ 17,685    $ 14,041    $ 12,472   $ 10,716   $  9,002
Long-term Debt                     538         811         434        490        539
Shareholders' Equity             3,899       4,387       2,604      2,026      1,948
Shareholders' Equity per
  Outstanding Share (2)           2.32        2.61        3.40       5.83       5.60
</TABLE>

(1)  The Company has never declared or paid a cash dividend on its common stock.
     It is the policy of the Board of  Directors  to retain  earnings for use in
     the  Company's  operations.  In addition,  the Company is  prohibited  from
     paying such dividends  based on its loan agreement with Congress  Financial
     Corporation.

(2)  Adjusted  to reflect a 1-for-10 reverse  stock split  effective  August 12,
     1996.


                                       16
<PAGE>

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS


     The  Company  operates  in  the  manufacturing  and  distribution  industry
segments.  For an understanding  of the significant  factors that influenced the
Company's  performance  during  the  past  three  fiscal  years,  the  following
discussion  should  be read  in  conjunction  with  the  consolidated  financial
statements,  including  the  related  notes,  and  other  information  appearing
elsewhere in this report.

Results of Operations.

     Fiscal 1998 Compared to Fiscal 1997

     Consolidated  net sales during fiscal 1998 increased 22.7% to approximately
$34,339,000 from $27,988,000  during fiscal 1997. In fiscal 1998,  Manufacturing
Operations  revenues,  including $1,123,000 of incremental sales attributable to
the glove  division  operation  (acquired  in April  1997),  increased  24.4% to
$24,767,000  from  $19,907,000  in fiscal 1997,  while  Distribution  Operations
revenues  increased 18.5% to $9,572,000 in fiscal 1998 from $8,081,000 in fiscal
1997.  The  Company  believes  that the  overall  increase  in sales  was due to
increased  demand  for the  Company's  products  in both the  manufacturing  and
distribution  segments,  the improvement in the Company's inventory position and
the continued overall improvement in industry conditions.

     The Company's overall gross profit  percentage  increased in fiscal 1998 to
16.6% as compared to 14.8% in fiscal 1997.  The gross profit  percentage for the
Distribution  Operations  decreased from 16.8% in fiscal 1997 to 16.1% in fiscal
1998.  The  decrease was  primarily  attributable  to a continued  change in the
customer base to industrial  customers from  environmental  customers  where the
gross profit is lower but where the customers are more stable and credit-worthy.
Additionally, the competitive environment in the marketplace continues to reduce
gross  profits.  The gross profit  percentage for the  Manufacturing  Operations
increased to 16.9% in fiscal 1998 from 14.0% for fiscal 1997.  This  increase in
gross profit was caused in part by (i) continued  increases in production levels
by the  Company's  contractor  in Mexico at lower costs for products  previously
produced in Puerto Rico and Alabama and (ii) continued  production  efficiencies
in Puerto Rico and Alabama to meet increased sales.

     Selling,   general  and  administrative   expenses  for  fiscal  1998  were
$5,369,000 or 15.6% of sales compared to $4,870,000 or 17.4% of sales for fiscal
1997.  The increase was  primarily due to (i) $225,000 in  incremental  expenses
attributable  to the  glove  division  (acquired  April  1997)  and  (ii) and an
increase in total non-glove operations  commissions of $113,000  attributable to
increased sales.

     Interest  expense was  $879,000  for fiscal 1998 as compared to $681,000 in
the prior year.  This  increase  was  principally  due to an increase in average
borrowings  in fiscal 1998 on the Company's  asset-based  facility with Congress
Financial  Corporation  ("Congress"),  as  well  as a full  year's  interest  on
additional  borrowings  from  Congress  used to  purchase  the  Minnesota  glove
business in April 1997.

     The  Company's  net loss for fiscal 1998 was  $488,000 as compared to a net
loss  of  $1,392,000  in  fiscal  1997.  Included  in  fiscal  1998 is a loss of
approximately   $266,000   (including   $108,000   in  non-cash   goodwill   and
depreciation)  related to the glove division  acquired in April 1997. During the
fourth  quarter of fiscal  1998,  the Company  incurred a net loss of  $656,000,
which was  primarily  the result of selling  price  reductions on certain of the
Company's  products  during the fourth  quarter  due to  competition  and market
conditions.  Another factor  contributing to this loss was a higher mix of sales
of  manufactured  products with lower  margins.  Additionally,  due to cash flow
requirements,  the Company  offered  certain  products at higher  selling  price
discounts in order to increase the borrowing base of accounts  receivable  under
its line of credit agreement with Congress.




                                       17
<PAGE>

     Fiscal 1997 Compared to Fiscal 1996

     The Company's net loss for fiscal 1997 was  $1,392,000,  as compared to net
income of $10,000 in fiscal 1996.

    Consolidated net sales during fiscal 1997 increased by 3.7% to approximately
$27,988,000 from $26,983,000  during fiscal 1996. In fiscal 1997,  Manufacturing
Operations  revenues  increased 11.3% to $19,907,000  from $17,889,000 in fiscal
1996 while  Distribution  Operations  revenues  decreased 11.1% to $8,081,000 in
fiscal  1997 from  $9,094,000  in fiscal  1996.  The Company  believes  that the
overall  increase  in  sales  was  due to  continued  increased  demand  for the
Company's  products in the manufacturing  segment.  The decrease in distribution
sales was due to a change  in focus in the  Company's  customers  from end users
engaged in hazardous  material  abatement  ("environmental  customers") to other
industrial end users ("industrial customers"). This caused a $1,631,000 decrease
in sales  to  environmental  customers,  only  partially  offset  by a  $618,000
increase in sales to industrial customers.

     The Company's overall gross profit  percentage  decreased in fiscal 1996 to
14.8% as compared to 20.3% in fiscal 1996.  The gross profit  percentage for the
Distribution  Operations  decreased from 18.5% in fiscal 1996 to 16.8% in fiscal
1997 due to a change  in the  customer  base  from  environmental  customers  to
industrial  customers where the customer base is more stable and  credit-worthy.
The gross  profit  percentage  for the  Manufacturing  Operations  was 14.0% for
fiscal 1997 as compared to 21.2% for fiscal 1996.  This  reduction was caused in
part by (1) the Company's  contractor in Mexico not meeting expected  production
levels, which forced higher production  domestically at higher costs, (2) higher
manufacturing costs due to payroll and other overhead  increases,  (3) increased
sales in lower gross profit products,  and (4) continued intense  competition in
the marketplace.

     During  the  first  three  months  ended  September  30,  1996 the  Company
sustained a decrease  in sales due to  hurricanes  in Puerto Rico that  affected
both production and shipments and therefore sales for that quarter. This loss in
production for the quarter caused lower  production  efficiencies in Puerto Rico
because of the weather related down-time.

     Selling,   general  and  administrative   expenses  for  fiscal  1997  were
$4,870,000  or 17.4% of sales  compared  to  $4,546,000  or 16.8%  for the prior
fiscal year. This increase was principally due to increased  marketing expenses,
including  a new  telemarketing  program and  catalogs,  an increase in bad debt
expense and  operating  expenses of the new glove  manufacturing  subsidiary  in
Minnesota acquired during April 1997.

     Interest  expense was  $681,000  for fiscal 1997 as compared to $836,000 in
the prior year.  This  decrease was due  principally  to a reduction in interest
rates from the Company's  major lender from 2 1/2% to 1% over the prime rate and
average lower borrowings during fiscal 1997.

     Net cash used for  operating  activities  was  principally  a result of the
Company's net loss, an increase in inventories and a reduction in accounts


                                       18
<PAGE>

payable.  Cash  flows  used in  investing  activities  was for the  purchase  of
property,  plant, and equipment,  and the acquisition of the glove manufacturing
business in Minnesota  completed in April 1997. Cash flows provided by financing
activities was  principally  from the proceeds of the rights and public offering
completed during November 1996.

     The Company,  in  connection  with the purchase of the glove  manufacturing
business  in  Minnesota  during the  fourth  quarter  of fiscal  1997,  borrowed
$440,000  from  Congress,  issued  100,000  shares of its Common Stock valued at
approximately  $412,000,  has agreed to make  additional  payments over the next
three to five years aggregating at least $240,000 and paid cash of approximately
$295,000 (see Note 12 of the Notes to the Consolidated Financial Statements).

     The  material  loss of $1.3  million  recorded by the Company in the fourth
quarter fiscal 1997 was incurred due to:

a) Serious  production  disruption  in Mexico began in April 1997 as a result of
the withdrawal of the Company's  manufacturing  contractor and  consequently the
need to manufacture these products at its plants in Alabama and Puerto Rico at a
net loss to meet short-term sales commitments and retain market share. The total
cost of this disruption was approximately $1,025,000.

b) The purchase of the new glove  division in April 1997 which resulted in lower
than expected sales with negligible gross profit and higher selling, general and
administrative  expenses.  The  foregoing  resulted  in a loss of  approximately
$56,000.

c)  Increases  in certain  reserves  and expense  accruals as a result of fourth
quarter events. This included auditing fees of approximately  $50,000,  bad debt
and  inventory  reserve  expenses   aggregating  $95,000,  and  advertising  and
catalogs,  which are  consistently  expensed  as the  catalogs  are  mailed,  of
approximately $80,000.

     The items  discussed  above  were  related  wholly to fourth  quarter  1997
events, having no impact on previously filed interim financial statements.

Liquidity and Capital Resources

     Net cash used for  operating  activities  was  principally  a result of the
Company's  net loss, an increase in  inventories  and  receivables  offset by an
increase in accounts  payable.  Cash flows used in investing  activities was for
the purchase of property, plant, and equipment. Cash flows provided by financing
activities was principally  from  borrowings  under the Company's loan agreement
with Congress.

     The  Company  has  working  capital as of June 30,  1998 of  $1,709,000  as
compared to working capital of $2,474,000 as of June 30, 1997. The decrease


                                       19
<PAGE>

resulted  primarily  from the  effect  of the loss as well as the  reduction  in
long-term debt. A substantial  portion of the Company's working capital consists
of inventory  which was  $7,850,000  and $5,973,000 as of June 30 1998 and 1997,
respectively. The Company is required to maintain substantial inventories of its
numerous  products to meet the immediate  requirements of its customers who need
products on short notice and who do not maintain an inventory of such products.

     The Company has a line of credit  agreement  with  Congress,  which expires
October  of 1999.  The line  provides  for  borrowings  up to  $9,000,000,  with
interest  payable  monthly at 1% above the prime rate, and an unused line fee of
1/4% a year. In August 1998, Congress amended its agreement to increase the line
of credit to  increase  the  maximum  the  Company  can borrow on the  inventory
portion to $4,500,000 from $3,850,000. The limits on borrowings remain at 85% of
eligible  accounts  receivable  and  55%  of  eligible  inventory.  The  amounts
outstanding at June 30, 1998 and June 30, 1997 were  $8,189,000 and  $5,418,000,
respectively.  The Company had $62,000  available for borrowing at June 30, 1998
based on its  formula  with  Congress.  The loan is subject  to certain  working
capital and net worth requirements and is collateralized by all of the assets of
the Company not  previously  pledged under other loan  agreements.  Although the
Company,  at June 30, 1998,  was not in  compliance  with the tangible net worth
requirement of the loan agreement,  Congress waived this default for this fiscal
year and reduced the  requirement for future periods (see Note 5 of the Notes to
the Consolidated Financial Statements). The loan agreement prohibits the payment
of cash dividends by the Company.

     The Company  believes that its current  working capital  position,  line of
credit and operations  will be sufficient to satisfy its cash needs through June
30, 1999.

     The Company has no material commitments for capital expenditures.

     At the present time, the Company, together with a variety of defendants, is
a party to various  asbestos-related  lawsuits  involving a number of plaintiffs
alleging  damages from exposure to asbestos  products  sold by the Company.  The
Company may become a party to additional asbestos-related actions in the future.
The Company is also party to a non-asbestos  product liability action.  While as
indicated  in Item 3.  Legal  Proceedings,  legal  and  settlement  costs to the
Company  have not been  material  to date,  the  Company  cannot,  at this time,
determine the outcome of these  uncertainties  which may have an adverse  effect
upon the liquidity of the Company in the future.

Year 2000

     The Company  does not believe,  based upon its  internal  reviews and other
factors, that future external and internal costs to be incurred relating to the

                                       20
<PAGE>

modification  of  internal-use  software  for the Year 2000 will have a material
effect on the Company's  results of operations or financial  position.  Although
the  Company  cannot  control  the  efforts of the third  parties  with which it
interfaces,  it does not currently anticipate that there will be any significant
disruption of the Company's ability to transact business.


Recent Events

     Late in the first  quarter of fiscal  1999,  Hurricane  Georges  struck the
Island of Puerto Rico,  causing  serious damage to the Island's  infrastructure.
The Company's  manufacturing  facility in Aguadilla was closed for approximately
three  weeks due to  disruption  of  utility  services;  however,  only  minimal
physical damage was sustained by the facility.  The Company anticipates that the
facility will be at full production by mid-October. Management believes that the
effect of Hurricane Georges will not have a significant impact on the results of
operations for the quarter ended September 30, 1998.

     Additionally,  the Company  anticipates  lower  gross  margins in the first
quarter due to intense  competition  in the  marketplace  resulting  from weaker
demand  emanating  from the  overall  effect of the  General  Motors  strike and
unseasonably hot weather.

Risks and Other Considerations

     From time to time,  information  provided by the Company or statements made
by its employees, or information provided in its filings with the Securities and
Exchange  Commission may contain  forward  looking  information.  Any statements
contained  herein or otherwise made that are not  statements of historical  fact
may be deemed to be forward looking statements.  Without limiting the foregoing,
the words "believes", "expects", "anticipates",  "plans" and similar expressions
are intended to identify forward looking statements. The Company's actual future
results may differ  materially from those projections or statements made in such
forward  looking  information  as a result of various  risks and  uncertainties,
including, but not limited, to the following:

     The Company,  since its fiscal year ended June 30, 1991 with the  exception
of fiscal years 1996 and 1995,  has had a history of significant  losses.  There
can be no  assurances  that the  Company  will be  profitable  or will not incur
losses in the future.

     The Company is dependent  upon its  revolving  line of credit with Congress
Financial  Corp.  In the event  that the  Company  is unable to comply  with its
obligations  to  Congress,   the  Company's   indebtedness   could  be  declared
immediately  due and payable and in certain cases the Company's  assets could be
foreclosed  upon. There can be no assurances that there will be other sources of
financing for the Company if required.

     The  Company is a party to  asbestos  litigation  and  additional  asbestos
actions  continue to be brought  against it. To date, the Company  believes that
its insurance  coverage has been adequate,  but there can be no assurances  that
such  coverage  will  continue to be  adequate  in the  future.  There can be no
assurances  that asbestos  litigation  will not have an adverse  affect upon the
Company. For a more complete discussion on asbestos litigation and the Company's
insurance  coverage,  reference is made to Item 3 of the Company's Form 10-K for
June 30, 1998 and future filings under form 10-Q.

     The Company has competitors that have greater financial,  management, sales
and technical resources than the Company.  The Company's success also depends to
a significant  degree on the  contributions  of its key management.  The loss of
services of one or more key members of management  could have an adverse  affect
upon the Company.  The Company is also  dependent upon DuPont which supplies the
Company with Tyvek(R)  which is used for various lines of the Company's  limited
use products.  Management believes that its current  relationship with DuPont is
satisfactory. The Company is a party


                                       21
<PAGE>

to a Garment  Manufacturer & Seller License  Agreement with DuPont,  pursuant to
which DuPont provides the Company with nonwoven fabric under its trademark. This
Agreement may be terminated by either party for any reason with 120 days notice.
Loss of DuPont as a supplier of Tyvek(R) would have material  adverse effects on
the Company's  operations.  The Company is also required to maintain substantial
inventory for its operations in order to meet the immediate  requirements of its
customers who require products on short notice.  There can be no assurances that
the Company  will be able to maintain  sufficient  inventory or that the Company
will not return to periods where there is sufficient working capital to maintain
its inventory to meet the needs of its customers.

     The Company also enjoys the benefits of various tax incentives with respect
to its  operations in Puerto Rico which are described in Item 1 of its Form 10-K
for June 30, 1998. If Puerto Rico's tax  exemptions  are reduced or expire,  the
Company  may be  required  to pay taxes on income  earned  in Puerto  Rico.  The
Company is unable to predict the amount of such impact after such exemptions are
reduced or expire.

     Due to the foregoing, the market price of the Company's Common Stock may be
volatile  at  times in  response  to  fluctuations  of the  Company's  operating
results,  changes in analyst earnings  estimates,  market  conditions as well as
general conditions and other factors general to the Company.



                                       22
<PAGE>

Item 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     See the Consolidated Financial Statements annexed hereto.


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS




To Eastco Industrial Safety Corp. and Subsidiaries:


We have audited the accompanying consolidated balance sheet of Eastco Industrial
Safety Corp. (a New York  corporation) and Subsidiaries as of June 30, 1998, and
the related consolidated  statements of income,  changes in shareholders' equity
and cash flows for the year then ended. These consolidated  financial statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on these financial statements based on our audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Eastco Industrial Safety Corp.
and  Subsidiaries  as of June 30, 1998, and the results of their  operations and
their cash flows for the year then ended in conformity  with generally  accepted
accounting principles.

Our  audit  was  made  for the  purpose  of  forming  an  opinion  on the  basic
consolidated  financial  statements taken as a whole. The schedule listed in the
index of financial  statements is presented  for purposes of complying  with the
Securities  and  Exchange  Commission's  rules  and is  not  part  of the  basic
consolidated  financial  statements.  This  schedule  has been  subjected to the
auditing  procedures  applied in the audit of the basic  consolidated  financial
statements  and, in our  opinion,  fairly  states in all  material  respects the
financial  data  required  to be set  forth  therein  in  relation  to the basic
consolidated financial statements taken as a whole.



                                                          /s/ARTHUR ANDERSEN LLP


Melville, New York
September 17, 1998


<PAGE>




CORNICK, GARBER & SANDLER, LLP
Certified Public Accountants



              Independent Auditors' Report on Supplemental Schedule




Board of Directors
Eastco Industrial Safety Corp.

     In connection with our audits of the consolidated  financial  statements of
Eastco  Industrial  Safety Corp. and  Subsidiaries at June 30, 1997 and 1996 and
for each of the two  years in the  period  ended  June 30,  1997,  we have  also
audited  Schedule II for each of the two years ended June 30, 1997,  included in
this annual report on Form 10-K. In our opinion,  such schedule  presents fairly
the information required to be set forth therein.
 

                                             /s/ Cornick, Garber & Sandler, LLP

                                             CORNICK, GARBER & SANDLER, LLP
                                             -----------------------------------
                                             CERTIFIED PUBLIC ACCOUNTANTS 


Uniondale, New York
October 27, 1997


<PAGE>


CORNICK, GARBER & SANDLER, LLP
Certified Public Accountants



                         Independent Auditors' Report




Board of Directors and Shareholders
Eastco Industrial Safety Corp.
Huntington Station, New York

     We have  audited  the  accompanying  consolidated  balance  sheet of Eastco
Industrial  Safety Corp.  and  Subsidiaries  as at June 30, 1997 and the related
consolidated statements of operations,  changes in shareholders' equity and cash
flows  for each of the two  years in the  period  ended  June  30,  1997.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. 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  aforementioned  consolidated  financial  statements
present fairly, in all material respects, the consolidated financial position of
Eastco  Industrial  Safety Corp.  and  Subsidiaries  as at June 30, 1997 and the
results  of their  operations  and their cash flows for each of the two years in
the period ended June 30, 1997, in conformity with generally accepted accounting
principles.

                                             /s/ Cornick, Garber & Sandler, LLP

                                             CORNICK, GARBER & SANDLER, LLP
                                             -----------------------------------
                                             Certified Public Accountants  

Uniondale, New York
October 27, 1997


<PAGE>

<TABLE>
<CAPTION>
                                      EASTCO INDUSTRIAL SAFETY CORP. AND SUBSIDIARIES

                                               CONSOLIDATED BALANCE SHEETS



                                                                                                                  June 30,
                                                                                                                  --------
                                        ASSETS                                                               1998           1997
                                        ------                                                               ----           ----
<S>                                                                                                    <C>             <C>         
CURRENT ASSETS:
   Cash and cash equivalents                                                                           $    223,125    $    112,258
   Accounts receivable, net of allowance for doubtful accounts of
     $185,000 and $219,000, respectively (Note 5)                                                         6,191,916       4,561,053
   Inventories (Notes 1, 2 and 5)                                                                         7,849,665       5,972,904
   Other current assets                                                                                     692,595         670,155
                                                                                                       ------------    ------------
                        Total current assets                                                             14,957,301      11,316,370

Property, plant and equipment, net (Notes 1, 3, 5 and 6)                                                  2,276,677       2,213,971
Excess of cost over net assets acquired (Note 1)                                                            426,229         448,910
Other assets                                                                                                 24,794          61,338
                                                                                                       ------------    ------------
                        Total assets                                                                   $ 17,685,001    $ 14,040,589
                                                                                                       ============    ============

                             LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
   Loans payable (Note 5)                                                                              $  8,189,842    $  5,417,675
   Current maturities of long-term debt (Note 6)                                                            277,628         278,821
   Accounts payable                                                                                       4,384,580       2,770,626
   Accrued expenses                                                                                         395,860         374,764
                                                                                                       ------------    ------------
                        Total current liabilities                                                        13,247,910       8,841,886

LONG-TERM DEBT, less current maturities (Note 6)                                                            538,283         811,410
                                                                                                       ------------    ------------
                        Total liabilities                                                                13,786,193       9,653,296
                                                                                                       ------------    ------------

COMMITMENT AND CONTINGENCIES (Notes 6, 8 and 11)

SHAREHOLDERS' EQUITY (Notes 1, 6 and 7):
   Preferred stock, $.01 par value; authorized 1,000,000 shares; no
     shares issued and outstanding                                                                              --              --
   Common stock, $.12 par value; authorized 20,000,000 shares;
     1,683,079 issued and outstanding                                                                       201,970         201,970
   Additional paid-in capital                                                                             9,807,708       9,807,708
   Accumulated deficit                                                                                   (6,110,870)     (5,622,385)
                                                                                                       ------------    ------------
                        Total shareholders' equity                                                        3,898,808       4,387,293
                                                                                                       ------------    ------------
                        Total liabilities and shareholders' equity                                     $ 17,685,001    $ 14,040,589
                                                                                                       ============    ============
</TABLE>


              The accompanying notes are an integral part of these
                          consolidated balance sheets.


                                      -2-
<PAGE>


<TABLE>
<CAPTION>
                 EASTCO INDUSTRIAL SAFETY CORP. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME



                                                                                             Years Ended June 30,
                                                                            --------------------------------------------------------
                                                                                 1998                   1997                 1996
                                                                                 ----                   ----                 ----
<S>                                                                         <C>                   <C>                   <C>         
NET SALES                                                                   $ 34,339,038          $ 27,987,969          $ 26,982,699

COST OF GOODS SOLD (Note 1)                                                   28,622,886            23,838,094            21,495,693
                                                                            ------------          ------------          ------------

                        Gross profit                                           5,716,152             4,149,875             5,487,006

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 1)                          5,369,397             4,870,030             4,546,222
                                                                            ------------          ------------          ------------

INCOME (LOSS) FROM OPERATIONS                                                    346,755              (720,155)              940,784

OTHER (INCOME) EXPENSE                                                           (44,166)               (9,074)               16,388

INTEREST EXPENSE                                                                 879,406               680,749               836,359

SETTLEMENT WITH FORMER UNDERWRITER (Note 7)                                         --                    --                  78,000
                                                                            ------------          ------------          ------------

                        Net (loss) income                                   $   (488,485)         $ (1,391,830)         $     10,037
                                                                            ============          ============          ============

(LOSS) INCOME PER SHARE (Note 1)
   Basic                                                                    $       (.29)         $       (.98)         $        .03
                                                                            ============          ============          ============
   Diluted                                                                  $       (.29)         $       (.98)         $        .02
                                                                            ============          ============          ============

AVERAGE NUMBER OF SHARES USED IN COMPUTING PER SHARE AMOUNTS
   Basic                                                                       1,683,079             1,413,775               362,391
                                                                            ============          ============          ============
   Diluted                                                                     1,683,079             1,413,775               595,758
                                                                            ============          ============          ============
</TABLE>


 The accompanying notes are an integral part of these consolidated statements.


                                      -3-
<PAGE>


<TABLE>
<CAPTION>
                 EASTCO INDUSTRIAL SAFETY CORP. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY


                                                                                              
                                                                                                           
                                                                        Common Stock *        Additional  
                                                                  ------------------------     Paid-In     Accumulated  
                                                                      Shares        Amount     Capital      (Deficit)       Total
                                                                  -----------    ---------    ----------   -----------   ----------
<S>                                                                 <C>          <C>          <C>          <C>           <C>       
BALANCE, July 1, 1995                                                 347,738    $  41,729    $6,224,509   $(4,240,592)  $2,025,646
   Shares issued on settlement with former underwriter                 10,000        1,200        70,825          --         72,025
   Exercise of Class A warrants                                         3,750          450        48,300          --         48,750
   Shares issued on conversion of subordinated debenture               26,374        3,165       121,963          --        125,128
   Purchase and retirement of common stock                            (21,374)      (2,565)     (177,435)         --       (180,000)
   Shares issued in private placement                                 399,000       47,880       454,314          --        502,194
   Net income for the year ended June 30, 1996                           --           --            --          10,037       10,037
                                                                  -----------    ---------    ----------   -----------   ----------
BALANCE, June 30, 1996                                                765,488       91,859     6,742,476    (4,230,555)   2,603,780
   Shares issued in private placement                                 114,000       13,680       140,320          --        154,000
   Shares issued in shareholder rights and public offering            703,591       84,431     2,524,405          --      2,608,836
   Sale of warrants to underwriter                                       --           --               7          --              7
   Shares issued for acquisition of glove manufacturing business      100,000       12,000       400,500          --        412,500
   Net loss for the year ended June 30, 1997                             --           --            --      (1,391,830)  (1,391,830)
                                                                  -----------    ---------    ----------   -----------   ----------
BALANCE, June 30, 1997                                              1,683,079      201,970     9,807,708    (5,622,385)   4,387,293
   Net loss for the year ended June 30, 1998                             --           --            --        (488,485)    (488,485)
                                                                  -----------    ---------    ----------   -----------   ----------
BALANCE, June 30, 1998                                              1,683,079    $ 201,970    $9,807,708   $(6,110,870)  $3,898,808
                                                                  ===========    =========    ==========   ===========   ==========
</TABLE>

*    Gives effect to a 1-for-10 reverse stock split in August 1996.

  The accompanying notes are an integral part of these consolidated statements.


                                      -4-
<PAGE>


<TABLE>
<CAPTION>
                 EASTCO INDUSTRIAL SAFETY CORP. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                                                                   Years Ended June 30,
                                                                                          ------------------------------------------
                                                                                             1998           1997           1996
                                                                                             ----           ----           ----
                                                                                                                               
<S>                                                                                    <C>             <C>             <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net (loss) income                                                                   $   (488,485)   $ (1,391,830)   $     10,037
   Adjustments to reconcile net (loss) income to net cash used
      in operating activities:
      Depreciation and amortization                                                         244,530         144,606         134,290
      Provision for losses on accounts receivable                                            52,000         104,736         105,732
      Shares issued for services and settlement with former underwriter                        --              --            72,025
      Net changes in assets and liabilities:
         Accounts receivable                                                             (1,682,863)          3,281        (876,629)
         Inventories                                                                     (1,876,761)       (603,667)       (866,339)
         Other current assets                                                               (22,440)       (228,392)         40,105
         Other assets                                                                        36,544         145,572         (75,122)
         Accounts payable                                                                 1,613,954        (463,505)        343,084
         Accrued expenses                                                                    21,096          83,423         (40,566)
                                                                                       ------------    ------------    ------------
                     Total adjustments                                                   (1,613,940)       (813,946)     (1,163,420)
                                                                                       ------------    ------------    ------------
                     Net cash used in operating activities                               (2,102,425)     (2,205,776)     (1,153,383)
                                                                                       ------------    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Acquisition of property and equipment                                                   (284,555)       (281,362)        (93,274)
   Acquisition of glove manufacturing business                                                 --          (734,526)           --
                                                                                       ------------    ------------    ------------
                     Net cash used in investing activities                                 (284,555)     (1,015,888)        (93,274)
                                                                                       ------------    ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Repayments of long-term debt                                                            (274,320)        (79,551)        (48,762)
   Borrowings under line of credit agreement                                             35,919,028      32,054,480      28,621,372
   Repayments under line of credit agreement                                            (33,146,861)    (32,489,880)    (27,697,205)
   Borrowings under Bridge loan                                                                --              --           500,000
   Repayment of Bridge loan                                                                    --              --          (500,000)
   Net proceeds from private placement of common stock                                         --           154,000         502,194
   Net proceeds from convertible subordinated debenture                                        --              --           225,128
   Net proceeds from shareholder rights and public offering                                    --         2,608,843            --   
   Borrowings to finance acquisition of glove manufacturing business                           --           440,000            --   
   Repayment of convertible subordinated debenture                                             --              --          (100,000)
   Proceeds from exercise of Class A warrants                                                  --              --            48,750
   Purchase of treasury stock                                                                  --              --          (180,000)
                                                                                       ------------    ------------    ------------
                     Net cash provided by financing activities                            2,497,847       2,687,892       1,371,477
                                                                                       ------------    ------------    ------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                        110,867        (533,772)        124,820

CASH AND CASH EQUIVALENTS, beginning of year                                                112,258         646,030         521,210
                                                                                       ------------    ------------    ------------

CASH AND CASH EQUIVALENTS, end of year                                                 $    223,125    $    112,258    $    646,030
                                                                                       ============    ============    ============

SUPPLEMENTAL CASH FLOW INFORMATION:
   Cash paid during the year for interest                                              $    879,406    $    680,749    $    836,359
                                                                                       ============    ============    ============
   Cash paid during the year for income taxes                                          $      8,454    $     12,758    $      5,440
                                                                                       ============    ============    ============

SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
   Noncash consideration for acquisition of glove manufacturing business:
      Common stock issued                                                              $       --      $    412,500    $       --
                                                                                       ============    ============    ============
      Minimum guaranteed payments                                                      $       --      $    240,000    $       --
                                                                                       ============    ============    ============
   Conversion of convertible subordinated debenture into common stock                  $       --      $       --      $    150,000
                                                                                       ============    ============    ============
   Retirement of treasury stock                                                        $       --      $       --      $    128,000
                                                                                       ============    ============    ============
</TABLE>


The accompanying notes are an integral part of these consolidated statements.


<PAGE>


                 EASTCO INDUSTRIAL SAFETY CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JUNE 30, 1998


1.   BUSINESS AND ORGANIZATION:
     --------------------------

Operations

Eastco Industrial Safety Corp. and Subsidiaries (the "Company")  operates in two
industry  segments.  The  first  is  the  manufacture  and  sale  of  industrial
protective clothing products to distributors throughout the United States and in
Puerto Rico. The second is the  distribution  and sale of industrial  protective
clothing and other protective products directly to "end users" located primarily
in the Northeastern United States and Puerto Rico.

The  Company's  manufacturing  division  uses  Tyvek(R)  to produce  limited use
clothing.  Tyvek(R) is sold solely by E.I. Dupont Industries, Inc. Products made
of Tyvek(R)  accounted for approximately  52%, 44% and 41% of consolidated sales
for the years ended June 30, 1998, 1997 and 1996, respectively.

Principles of Consolidation

The consolidated  financial statements include the accounts of Eastco Industrial
Safety  Corp.  and  its  subsidiaries,   all  of  which  are  wholly-owned.  All
significant  intercompany  balances and  transactions  have been  eliminated  in
consolidation.

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  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company  considers  all highly  liquid  debt  instruments  purchased  with a
maturity of three months or less to be cash equivalents.

Inventories

Inventories are stated at the lower of cost (determined on a first-in, first-out
basis) or market, which represents estimated net realizable value.

Depreciation and Amortization

Property,  plant and equipment are depreciated on a straight-line basis over the
estimated  useful  lives  of the  related  assets.  Leasehold  improvements  are
amortized on a straight-line  basis over the shorter of their  estimated  useful
lives or the remaining term of the lease.


                                      -6-
<PAGE>


Excess of Cost over Net Assets Acquired

The excess of cost over the net assets of a business  acquired  in April 1997 is
being  amortized on a straight-line  basis over its estimated  useful life of 20
years (Note 12).  Management  periodically  evaluates  this asset for impairment
using estimated future cash flows from the acquired business and other estimates
of cost recoverability.

Fair Value of Financial Instruments

Cash and cash  equivalents,  receivables,  loans payable and long-term  debt are
reflected in the consolidated balance sheets at amounts considered by management
to reasonably  approximate their fair value because of their relative short-term
maturities, recent incurrence or because they bear variable interest rates.

Stock Options and Warrants

In 1997,  the Company  adopted the  disclosure  only  provisions of Statement of
Financial  Accounting  Standards  ("SFAS") No. 123,  "Accounting for Stock Based
Compensation" for stock options and warrants granted to its employees,  officers
and directors  and,  therefore,  continues to apply the provisions of Accounting
Principles  Board Opinion No. 25 and related  interpretations  in its accounting
for such grants.  Accordingly,  no  compensation  cost is  recognized  for these
grants unless they are for less than fair value at issuance or are  considered a
variable award.

Per Share Amounts

The Company adopted Statement of Financial  Accounting  Standards No. 128 ("SFAS
128"), "Earnings Per Share" during 1998. Under the new standard,  basic earnings
per share is computed  based on the  weighted  average  number of common  shares
outstanding  and excludes any  potential  dilution;  diluted  earnings per share
reflects  potential  dilution from the exercise or conversion of securities into
common stock.  Earnings per share data for all prior periods presented have been
restated to conform with the  provisions of SFAS 128.  Common stock  equivalents
are excluded from the  computation for the years ended June 30, 1998 and 1997 as
they would have an  anti-dilutive  effect.  The number of shares of common stock
subject to stock options  included in diluted earnings per share was 232,827 for
the year ended June 30, 1996.

Recently Issued Accounting Standards

In June 1997,  the FASB issued SFAS No. 130  "Reporting  Comprehensive  Income."
SFAS  No.  130   establishes   standards   for  the  reporting  and  display  of
comprehensive  income and its components in a full set of financial  statements.
The  Company's  consolidated  financial  statements  will be required to include
comprehensive  income  disclosures  beginning  with the first  quarter of fiscal
1999.  Restatement  of prior  period  information  will be made for  comparative
purposes, if applicable.

In June 1997,  the FASB issued SFAS No. 131  "Disclosures  about  Segments of an
Enterprise and Related  Information." SFAS No. 131 establishes standards for the
reporting of operating segments in interim and annual financial  statements,  as
well as requiring related  disclosures  about products and services,  geographic
areas and major  customers.  This standard is effective for the Company's fiscal
1999 financial  statements.  Initial adoption of this standard may take place on
an interim or year end basis.

SFAS Nos. 130 and 131 expand and modify financial  statements  disclosures and ,
accordingly,  will have no impact on the  Company's  results  of  operations  or
financial position.


                                      -7-
<PAGE>


In June 1998,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting  Standards No. 133,  "Accounting of Derivative  Instruments
and Hedging Activities" ("SFAS 133"). The Statement  establishes  accounting and
reporting  standards  requiring  that  every  derivative  instrument,  including
certain derivative  instruments embedded in other contracts,  be recorded in the
balance  sheet as either an asset or liability  measured at its fair value.  The
Statement  requires  that changes in the  derivative's  fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting  for  qualifying  hedges  allows a  derivative's  gains and losses to
offset related results on the hedged item in the income statement,  and requires
that a company must formally document,  designate,  and assess the effectiveness
of transactions that receive hedge accounting.  SFAS 133 is effective for fiscal
years beginning after June 15, 1999 and will not require retroactive restatement
of  prior  period  financial  statements.  The  Company  currently  does not use
derivatives nor does it engage in hedging  transactions or anticipate a material
impact in future years.

2.   INVENTORIES:
     ------------

Inventories consist of the following at June 30:

                                                       1998              1997
                                                    ----------        ----------
      
      Raw materials                                 $1,579,096        $2,049,328
      Work-in-process                                  802,011         1,145,395
      Finished goods                                 5,468,558         2,778,181
                                                    ----------        ----------
                              Total                 $7,849,665        $5,972,904
                                                    ==========        ==========

3.   PROPERTY, PLANT AND EQUIPMENT, NET:
     -----------------------------------

Property, plant and equipment is comprised of the following at June 30:

<TABLE>
<CAPTION>
                                                                                                                        Estimated
                                                                                                                          Useful
                                                                               1998                   1997              Life (Years)
                                                                               ----                   ----              ------------
<S>                                                                       <C>                    <C>                    <C>      
    Cost:
      Land                                                                $   382,000            $   382,000               N/A
      Building and leasehold improvements                                     842,967                833,741            5 - 40
      Machinery and equipment                                               2,377,079              2,106,191            3 - 10
      Furniture and fixtures                                                  250,604                246,163            7 - 10
                                                                          -----------            ----------- 
                            Total                                           3,852,650              3,568,095
      
    Less: accumulated depreciation and amortization                        (1,575,973)            (1,354,124)
                                                                          -----------            ----------- 
                            Balance                                       $ 2,276,677            $ 2,213,971
                                                                          ===========            ===========
</TABLE>

Depreciation and amortization expense for property,  plant and equipment for the
years ended June 30,  1998,  1997 and 1996  amounted to  $221,849,  $139,881 and
$134,290, respectively.

4.   INCOME TAXES:
     -------------

The Company  accounts  for income  taxes under the  provisions  of  Statement of
Financial Accounting Standards No. 109 ("SFAS 109"). While SFAS 109 requires the
recognition  of a  deferred  tax asset for the  benefit  of net  operating  loss
carryforwards, it also requires the recognition of a valuation allowance when it
is more likely than not that such benefit  will not be realized.  As a result of
the Company's history of losses, it has recorded a valuation  allowance equal to
the net deferred tax asset accounts as of June 30, 1998 and 1997.


                                      -8-
<PAGE>


Deferred  income  taxes  relate  to  the  following  temporary  differences  and
carryforwards as of June 30:

<TABLE>
<CAPTION>
                                                                                   1998                    1997
                                                                                   ----                    ----
Deferred tax assets:
<S>                                                                            <C>                      <C>        
   Net operating loss carryforwards                                            $ 2,356,000              $ 2,121,000
   Allowance for doubtful accounts and credits                                      79,000                   88,000
   Tax basis adjustments to inventory                                              139,000                   51,000
   Accelerated depreciation of property and equipment                                5,000                    --
                                                                               -----------              -----------
                        Total                                                    2,579,000                2,260,000
                                                                               -----------              -----------

Less deferred tax liability:
   Accelerated depreciation of property and equipment                                 --                     37,000
   Other                                                                            18,000                     --
                                                                               -----------              -----------
                        Total                                                       18,000                   37,000
                                                                               -----------              -----------
                        Balance                                                  2,561,000                2,223,000

Less: valuation allowance                                                       (2,561,000)              (2,223,000)
                                                                               -----------              -----------

Net deferred income taxes after valuation allowance                            $      --                $      --
                                                                               ===========              ===========
</TABLE>


Two wholly-owned  Puerto Rico based  subsidiaries  have been granted  exemptions
from  paying  Puerto  Rico  income  taxes  under  provisions  of the Puerto Rico
Industrial  Tax Exemption Act of 1963,  provided such  subsidiaries  continue to
meet the  terms and  conditions  of their  grants.  One  subsidiary's  exemption
expires June 30, 1999.  This subsidiary has received a 90% exemption from Puerto
Rico income taxes and a 75%  exemption  from Puerto Rico  municipal and property
taxes.  The second  subsidiary  has  received a 90%  exemption  from Puerto Rico
income and property taxes and a 60% exemption from Puerto Rico municipal  income
taxes to June 2006. These subsidiaries have elected,  pursuant to Section 936 of
the  Internal  Revenue  Code,  to receive  credits  equivalent  to the amount of
Federal income taxes which would  otherwise be due on their income.  The Omnibus
Budget  Reconciliation Act of 1993 (the "Act") imposes  limitations on computing
the Possession Tax Credit under Section 936 for tax years  beginning after 1993.
In addition,  the Act makes the 100% dividends received deduction subject to the
Alternative  Minimum Tax  calculation.  The Small Business Job Protection Act of
1996 further  limits the Possession  Tax Credit for years  beginning  after 2001
with the credit being eliminated after the years beginning after 2005.

Dividends,  if paid by the  Puerto  Rico  based  subsidiaries, are  subject to a
withholding tax of 10%; however,  no taxes have been provided on their aggregate
undistributed earnings (of approximately $1,187,000 at June 30, 1998) because it
is management's intention to reinvest such earnings indefinitely.

A  reconciliation  between the federal  statutory tax rate and the effective tax
rate is as follows:

<TABLE>
<CAPTION>
                                                                                                      Years ended June 30,
                                                                                            ----------------------------------------
                                                                                               1998           1997            1996
                                                                                               ----           ----            ----

<S>                                                                                         <C>            <C>            <C>      
Income tax (benefit) expense at the statutory rate                                          $(166,085)     $(529,000)     $   3,000
Effect of net operating loss of Puerto Rican
  subsidiaries for which there is no current tax benefit                                      256,085        172,000           --   
Effect of domestic net operating loss for which there is
 no current tax benefit                                                                          --          357,000           --   
Benefit of utilization of net operating loss
 carryforwards                                                                                (90,000)          --           (3,000)
                                                                                            ---------      ---------      ---------

Actual income tax expense                                                                   $    --        $    --        $    --
                                                                                            =========      =========      =========
</TABLE>


                                      -9-
<PAGE>


At  June  30,  1998,  the  Company  has  net  operating  loss  carryforwards  of
approximately $6,200,000 for federal income tax purposes. The Company's domestic
operations  generated  taxable  income  in  fiscal  1998 for  which it  utilized
approximately  $265,000 of net operating loss carryforwards.  Such carryforwards
expire from 2005 through 2013. As a result of the private placement  offering in
June 1996, the amount of the loss carryforwards  which can be utilized to offset
future taxable income will be limited to  approximately  $345,000 per year, plus
any loss carryforwards incurred after June 30, 1996. However, to the extent such
annual limitation is not utilized in any year, it may be further carried forward
until the carryforward would have otherwise expired.

5.   LOANS PAYABLE:
     --------------

Loans payable at June 30, 1998 and 1997 are  comprised of  borrowings  under the
Company's  line  of  credit  agreement  with  Congress   Financial   Corporation
("Congress").

The Company  amended and extended  its line of credit  agreement  with  Congress
during 1997. The line, which expires in October 1999, provides for borrowings up
to $9,000,000 with interest  payable monthly at 1% above the prime rate (8.5% at
June 30, 1998),  plus an unused line fee of 1/4% a year.  Borrowings are limited
to 85% of  eligible  accounts  receivable  and 55% of eligible  inventory  up to
maximum inventory  borrowings of $3,850,000.  In August 1998, the line of credit
agreement was amended to increase  maximum  inventory  borrowings to $4,500,000.
The loans are subject to certain working capital and net worth  requirements and
are  collateralized  by all assets of the Company not  previously  pledged under
other loan agreements.  The loan agreement prohibits the payment of dividends by
the  Company.  The Company  had an  informal  agreement  with  Congress  whereby
Congress  agreed to provide the  Company an  additional  $500,000  in  borrowing
availability  of which $250,000 was repaid at $11,250 a week beginning  November
1, 1993. In September 1993, Congress sold to three individuals, who are officers
and  directors of the Company,  $250,000 in junior  participations  in the loans
made to the Company.  Congress repurchased $35,000 of the junior  participations
in May 1996 and the remaining balance during November 1996.

The Company was not in  compliance  with the tangible net worth  requirement  at
June 30,  1998;  however,  Congress  has waived  such  covenant  and  amended it
downward to  $3,100,000  for the year ending  June 30,  1999,  and not less than
$3,500,000 at all times thereafter.

6.   LONG TERM DEBT:
     ---------------

     Long term debt is comprised of the following at June 30:
     
<TABLE>
<CAPTION>
                                                                                                   1998               1997
                                                                                                   ----               ----
     <S>                                                                                       <C>                 <C>       
     Mortgage payable - interest at 12% per annum, collateralized by land,
      building and personal property (a)                                                       $  404,985          $  433,736
     Mortgage payable - interest at 1 1/4% above the prime rate,
      collateralized by all assets of the Puerto Rico subsidiaries (b)                            119,725             215,311
     Term loan - interest at 1 1/4% above the prime rate, collateralized by all
      assets of the Company not previously pledged(c)                                             123,034             209,517
     Guaranteed payments for purchase of glove manufacturing business
      (see Note 12) (d)                                                                           168,167             231,667
                                                                                               ----------          ----------
                           Total                                                                  815,911           1,090,231
     
     Less: current maturities                                                                     277,628             278,821
                                                                                               ----------          ----------
     Noncurrent portion                                                                        $  538,283          $  811,410
                                                                                               ==========          ==========
</TABLE>


                                      -10-
<PAGE>


Maturities of the long-term debt are as follows:

Year ending June 30:

               1999                       $277,628
               2000                        151,411
               2001                         52,993
               2002                         53,962
               2003                        279,917
                                          --------
                       Total              $815,911
                                          ========

(a)  The mortgage with an original  interest rate of 14.0% per annum,  and which
     was due in July 1997,  was amended and extended on September 26, 1996.  The
     amendment  reduced the annual  interest  rate to 12.0%  commencing  July 1,
     1997,  with  monthly  payments  of  $6,223  until  July 1,  2002,  when the
     remaining balance of approximately  $275,000 is payable. In connection with
     the original  mortgage in 1992,  the Company  issued five year  warrants to
     acquire  10,833  shares at $30.00 a share.  In January  1995,  the  Company
     reduced the exercise price to $13.00 and extended the expiration date until
     April  1999.  Approximately  38% of this  mortgage  is  held by a group  of
     investors which includes the spouses of certain  officers and directors and
     a past  director  of the  Company.  Interest  on  the  mortgage  aggregated
     approximately  $46,000,  $65,000  and  $72,000 for the years ended June 30,
     1998, 1997 and 1996, respectively.

(b)  The mortgage is repayable in 29 monthly  principal  installments  of $7,690
     plus  interest  to October 1, 1999.  The funds  received  were used for the
     acquisition of the glove manufacturing business (see Note 12).

(c)  The term loan is repayable in 29 monthly principal  installments of $7,483,
     plus interest to October 1, 1999. The funds received were also used for the
     acquisition of the glove manufacturing business (see Note 12).

(d)  This amount is  comprised  of  guaranteed  payments to two  individuals  in
     connection with the acquisition of the glove  manufacturing  business.  One
     individual  is entitled to 10% of income  before  taxes (as defined) of the
     glove  manufacturing  business for the five year period  commencing July 1,
     1997,  up to a maximum of  $180,000,  but in no event less than $18,000 per
     year, for which the Company has accrued the $90,000  minimum  payment.  The
     second individual entered into a consulting  agreement with the Company for
     a three year period  commencing  April 17,  1997,  which calls for a fee of
     $50,000 per year, payable in monthly installments.  The Company has accrued
     the $150,000  required  payment.  The $240,000  accrued  aggregate  minimum
     payments, which  are due  regardless  of  continued  employment,  have been
     recorded  as  additional  purchase  price.  No  imputed  interest  has been
     recorded on these payments as the effect would not be material.

7.   SHAREHOLDERS' EQUITY:
     ---------------------

Preferred Stock

On August 12, 1996, the shareholders of the Company approved an amendment to the
Company's   certificate  of  incorporation  to  authorize  1,000,000  shares  of
preferred stock. No preferred shares have been issued.


                                      -11-
<PAGE>


Common Stock

On August 12, 1996, the  shareholders of the Company approved a 1-for-10 reverse
stock  split of all  outstanding  shares  of the  Company's  common  stock.  The
consolidated  financial  statements  and notes thereto give effect to this split
for all periods presented.

In April 1991, the Company sold, pursuant to a rights offering, 48,007 shares of
common stock. In this connection, the underwriter was sold a warrant to purchase
4,078 shares of common stock at $53.30 per share,  which was  exercisable  until
February 28, 1996.  The Company also had borrowed  $200,000 with interest at 17%
per annum during  February 1991 from five  unrelated  parties.  These loans were
repaid  out of the  proceeds  of the rights  offering,  including  interest.  In
connection with these loans,  the Company issued warrants to purchase 833 shares
of common stock,  exercisable at $30.00 per share until May 13, 1996. In January
1995, the Company reduced the exercise price of the above warrants to $13.00 and
extended their expiration dates until April 1999.

In April  1996,  the holder of a $250,000  convertible  subordinated  debenture,
issued in February 1996,  converted $150,000 of the debenture into 26,374 shares
of the Company's  common stock. The Company  repurchased  21,374 of these shares
for  $180,000  and  retired the stock.  The  remaining  $100,000  balance of the
debenture was  repurchased  for $120,000.  The $20,000  excess has been included
with interest expense for the year ended June 30, 1996.

On April 19, 1994, the Company sold in a public offering 200,000 units at $20.00
per unit,  each  consisting of one share of the  Company's  common stock and one
Class A warrant.  Each  warrant  entitled  the holder to  purchase  one share of
common stock at an exercise  price of $24.00 a share from April 12, 1995 through
April 12, 1999.  In January  1995,  the Company  reduced the  exercise  price to
$13.00 a share.  These warrants are redeemable by the Company  commencing  April
12, 1995 at $1.00 per warrant,  provided that the high bid price of its stock is
at  least  $19.50  for the  required  number  of days  prior  to the  Notice  of
Redemption.  The Company also granted to the  underwriter an option to purchase,
at the same  price,  30,000  units to cover  over-allotments.  This  option  was
exercised in May 1994. In addition,  the Company sold to the underwriter for $10
an option, exercisable from April 12, 1995 to April 12, 1999, to purchase 23,000
additional  units at  $29.00  per unit and  entered  into a two year  consulting
agreement  with the  underwriter  at a total cost of $72,000.  Subsequent to the
public offering, two officers of the underwriter became directors of the Company
until their resignations on July 10, 1995.

On July 10,  1995,  the  Company  issued  10,000  shares of common  stock to the
underwriter of its 1994 public stock  offering in exchange for the  cancellation
of all of its rights under the Underwriting Agreement. The $78,000 cost thereof,
equal to the market value of the shares issued and legal expenses  incurred,  is
separately reflected in the consolidated  statement of income for the year ended
June 30, 1996.

In October 1996, the Company sold, pursuant to a combination  shareholder rights
and public offering,  703,591 units at $5.00 per unit, with each unit consisting
of one share of common stock and one Class B warrant.  Each warrant entitles the
holder to purchase one share of common  stock at an exercise  price of $6.25 per
share during the period from twelve months to three years after the closing date
of the offering.  The warrants may be repurchased  by the Company,  upon 30 days
prior written notice,  eighteen months after the offering at $.01 per warrant if
the high bid price of the  common  stock  for the 15  consecutive  trading  days
ending  on the third day prior to the date of notice is in excess of 150% of the
exercise  price  of  the  warrant.   The  Company  also  sold  to  the  offering
agent/underwriter,  for a total value of $7,  warrants to purchase 70,359 units.
The  warrants are  exercisable  at $6.00 per unit for four years  commencing  in
November  1997.  In addition,  the Company  entered  into a one year  consulting
agreement with the offering agent/underwriter for approximately $70,000.


                                      -12-
<PAGE>


Private Placements

On June 28, 1996, the Company issued,  in a private  placement,  10 1/2 units at
$57,000 a unit,  with each unit  consisting  of 38,000  shares of the  Company's
common stock. The net proceeds to the Company were approximately  $501,000 after
fees to the placement agent and other expenses.  The proceeds were used to repay
a $500,000  bridge loan  obtained in May 1996.  On July 9, 1996, an additional 3
units were sold for net proceeds of approximately  $165,000.  The Company issued
three year warrants to purchase 2,500 shares of common stock at $10.00 per share
in connection with the foregoing transactions.

Other Warrants

On May 13,  1996,  warrants to purchase  9,003  shares each were  granted to the
Company's then president and two of the  vice-presidents for their guarantees of
overadvances  by  Congress  (see Note 5). The  warrants  are  exercisable  until
February 23, 2001 at $5.35 per share. The fair value of these warrants using the
Black Scholes option pricing model is $4.12.

On July 26, 1995, the Company issued to a consulting firm, which is the employer
of a then-new  director of the Company,  a five year warrant to purchase  12,500
shares of the Company for $12.50 a share.  The fair value of the warrants  using
the Black Scholes option pricing model is $9.78.

In January 1994, a corporate officer/director of the Company purchased a warrant
from a prior  lender.  The warrant is for the purchase of 92,477 shares at $5.62
per share.  The expiration date of this warrant was extended from March 31, 1997
until April 11, 1999.

Incentive Stock Option Plans

The  Company's  1992  Incentive  Stock Option Plan  provides for the granting of
options for up to 20,000  shares of the  Company's  common stock to December 20,
2002.  At June 30, 1998,  options to purchase 300 shares at $27.50 per share are
outstanding and exercisable.  The Company has agreed not to issue any additional
options under this plan.

The  Company's  1994  Incentive  Stock Option Plan  provides for the granting of
options for up to 10,000 shares of the  Company's  common stock to January 2004.
At June 30,  1998,  options  to  purchase  8,500  shares at $10.63 per share are
outstanding and exercisable.

On August 12, 1996, the shareholders approved the adoption of the 1996 Incentive
Stock Option Plan,  which provides for the granting of options for up to 300,000
shares of the Company's common stock to key employees until May 2006. As of June
30, 1998,  231,100  stock  options were granted to employees at exercise  prices
ranging from $2.25 - $3.44, of which 59,500 are  exercisable.  Of these options,
140,000 will vest over the next three  years;  the  remaining  options will vest
based upon the Company achieving certain sales and income requirements.

Options granted under the incentive stock option plans must be exercised  within
such period as stated in the plans and, in any event, must be exercised no later
than ten years  after  the date they are  granted.  The plans  provide  that the
exercise price of the options may not be less than 100% of the fair market value
of common stock at the date of grant or 110% in the case of an  incentive  stock
option  granted to any employee  owning more than 10% of the voting power of all
classes of stock of the Company.


                                      -13-
<PAGE>


Transactions  under the above  Incentive  Stock Option plans are  summarized  as
follows:

<TABLE>
<CAPTION>
                                                                   June 30, 1998             June 30, 1997           June 30, 1996
                                                               -----------------------    --------------------    ------------------
                                                            
                                                                              Weighted                Weighted              Weighted
                                                                               Average                Average               Average
                                                                              Exercise                Exercise              Exercise
                                                                 Shares        Price      Shares      Price       Shares     Price
                                                                --------      ------     --------     ------     --------     ------

<S>                                                              <C>          <C>        <C>          <C>           <C>       <C>   
Outstanding at beginning of year                                 241,065      $ 2.66        9,665     $12.60        9,665     $12.60
   Granted                                                         1,400      $ 2.58      231,400     $ 2.25         --         -- 
   Forfeited                                                        (400)     $ 2.25         --         --           --         --
   Expired/Canceled                                               (2,165)     $12.08         --         --           --         --
                                                                --------      ------     --------     ------     --------     ------

Outstanding at end of year                                       239,900        2.58      241,065       2.66        9,665      12.60
                                                                ========                 ========     ======     ========     ======
Exercisable at end of year                                        68,300        3.41       69,065       4.30        9,665      12.60
                                                                ========                 ========     ======     ========     ======
Weighted average fair value of 
 options granted                                                  $ 2.34                 $   2.06                     --
</TABLE>

Other Stock Options

1996 Stock Options

On  August  12,  1996,  the  shareholders  approved  the  adoption  of the  1996
Nonqualified  Stock Option Plan,  which provides for the granting of options for
up to 300,000  shares of the  Company's  stock until August 2006. As of June 30,
1998,  124,000  nonqualified  stock options were granted to employees  under the
1996  Nonqualified  Stock  Option Plan at exercise  prices  ranging from $2.25 -
$3.44 per share, of which 31,100 are exercisable.

1995 Stock Options

On January  20,  1995,  the Board of  Directors  granted to the  Company's  then
president  and two  vice-presidents  ten-year  nonqualified  options to purchase
249,708 shares at $5.17 per share. The options are exercisable  after five years
but may become  exercisable  sooner upon the Company  achieving  pretax earnings
targets. As of June 30, 1998, options for 124,854 shares are exercisable.

Other nonqualified  options  outstanding and exercisable at June 30, 1998, under
prior years'  grants,  aggregate  3,108  shares at exercise  prices of $16.88 to
$30.00 a share.

Non-qualified stock option activity is summarized as follows:

<TABLE>
<CAPTION>
                                                             June 30, 1998                June 30, 1997             June 30, 1996
                                                             -------------                -------------             -------------
                                                                                                                
                                                                        Weighted                   Weighted                 Weighted
                                                                        Average                    Average                  Average
                                                                        Exercise                   Exercise                 Exercise
                                                            Shares       Price          Shares      Price         Shares     Price
                                                            ------       -----          ------      -----         ------     -----
<S>                                                        <C>          <C>             <C>         <C>           <C>         <C>   
Outstanding at beginning of year                           395,816      $ 4.17          252,816     $ 5.26        249,816     $ 5.12
   Granted                                                  21,000      $ 3.44          143,000     $ 2.25          3,000      16.88
   Forfeited                                               (32,000)     $ 2.25             --         --             --         --  
   Expired/Canceled                                         (8,000)     $ 2.25             --         --             --         --
                                                          --------    --------         --------     ------       --------     ------
                                                                                                                
Outstanding at end of year                                 376,816        3.84          395,816     $ 4.17        252,816       5.26
                                                          ========                     ========                  ========
Exercisable at end of year                                 159,062        4.86          156,562     $ 4.83        127,962       5.40
                                                          ========                     ========                  ========
Weighted average fair value of options granted                                                                  
                                                            $ 3.13                     $   2.06                    $15.49
</TABLE>                                                                    
                                                                            
                                                                            
                                      -14-
<PAGE>


The following table summarizes  information  about stock options  outstanding at
June 30, 1998:

<TABLE>
<CAPTION>
                                                        Options Outstanding                                Options Exercisable
                                        ------------------------------------------------------      --------------------------------
                                          Number           Weighted             Weighted              Number             Weighted
                                        Outstanding        Average              Average             Exercisable          Average
                                            at             Remaining            Exercise                at               Exercise
    Range of Exercise Prices             6/30/98         Contractual Life        Price                6/30/98             Price
    ------------------------             -------         ----------------        -----                -------             -----

<S>              <C>                      <C>                 <C>                 <C>                  <C>                  <C>    
$    2.25    -   $   3.38                 334,100             8.99                $  2.25               80,100              $  2.26
     3.39    -       5.08                  21,000             9.78                $  3.44               10,500              $  3.44
     5.09    -       7.63                 249,708             6.56                $  5.11              124,854              $  5.11
     7.64    -      11.46                   8,500             6.56                $ 10.63                8,500              $ 10.63
    11.47    -      17.21                   3,000             7.07                $ 16.88                2,000              $ 16.88
    25.84    -      38.76                     408             5.04                $ 28.16                  408              $ 28.16
                                          -------                                                      -------
                                          616,716                                                      227,362
                                          =======                                                      =======
</TABLE>


If the Company had elected to recognize  compensation  cost for option grants to
its  employees,  officers and directors  under the fair value method of SFAS No.
123, rather than continue to apply the provisions of Accounting Principles Board
Opinion No. 25, net income  (loss) and the related per share  amounts would have
been reported as indicated by the following pro forma amounts:

<TABLE>
<CAPTION>
             Year Ended June 30:                           1998                   1997                       1996
             -------------------                           ----                   ----                       ----
<S>                                                  <C>                    <C>                            <C>    
             Net (loss) income:
                As reported                          $    (488,485)         $  (1,391,830)                 $10,037
                Pro forma                                  649,562             (1,452,962)                  10,037
             
             (Loss) income per share:
                Basic                                     $   (.29)              $   (.98)                  $  .03
                Pro forma                                 $   (.39)              $  (1.03)                  $  .03
                Diluted                                   $   (.29)              $   (.98)                  $  .02
                Pro forma                                 $   (.39)              $  (1.03)                  $  .02
             
             
</TABLE>

The fair value of each stock  option  grant is estimated as of the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions:

                                                           June 30,
                                              ----------------------------------
                                               1998          1997           1996
                                               ----          ----           ----

Risk-free interest rate                        6.56%         6.70%         6.61%
Expected lives                                   10            10            10
Expected volatility                            96.2%         80.4%         99.4%
Expected dividend yields                          0%            0%            0%


                                      -15-

<PAGE>


8.    COMMITMENTS AND CONTINGENCIES :

Rent

The  Company  is  obligated  through  August  2003 under  several  noncancelable
long-term  operating leases covering office,  factory and warehouse  facilities.
Minimum annual rentals under leases are:

              Year Ending June 30:
                               1999                               $137,000
                               2000                                157,000
                               2001                                142,000
                               2002                                151,000
                               2003 and thereafter                 182,000
                                                                  --------
                                 Total                            $769,000
                                                                  ========
                                          
Rent expense,  including  month-to-month  rentals,  was  $412,000,  $289,000 and
$226,000 in the fiscal years ended June 30, 1998, 1997 and 1996, respectively.

Employment Agreements

The Company has employment agreements with three of its officers which commenced
on July 1,  1995.  On  March 1,  1997,  these  officers  were  appointed  to new
positions  with certain  changes to their  agreements  and two new officers were
elected.  The following is a summary of these  employment  agreements as of June
30, 1998:

     Officer                                Expiration Date        Annual Salary
     -------                                ---------------        -------------

President (a)                                   July 1, 2001          $125,000
Senior Vice-President (b)                       July 1, 2001          $113,000
Senior Vice-President and Secretary (c)         July 1, 2001          $ 62,500
Vice-President of Finance                   January 31, 2001          $ 92,500
Vice-President of Manufacturing             January 31, 2001          $ 98,800
                                                                     
(a)  This  officer  is  entitled  to a bonus of 3 1/3% of the  Company's  income
     before  taxes  and  interest  and a bonus of 3/4% of net sales in excess of
     $20,500,000.

(b)  This  officer  is  entitled  to a bonus of 3 1/3% of the  Company's  income
     before taxes and interest.

(c)  This  officer  is  entitled  to a bonus of 3 1/3% of the  Company's  income
     before taxes and interest.

Each of the agreements  provides for minimum annual increases of 10%, commencing
at various dates, and has automatic renewal provisions.

In  addition,  should an unrelated  party obtain more than 20% of the  Company's
then outstanding stock, other than by transactions initiated by the Company, the
following will occur for three of the officers:

(a)  Each will be paid a bonus equal to their  minimum  base salary for the next
     three  years 

(b)  All rights (options,  warrants,  etc.) will become  immediately  vested and
     exercisable

For the remaining  two officers,  should a majority of the Board of Directors be
replaced, other than by voluntary resignation or their demise, the employees can
terminate  their  agreement  within six months of such  occurrence and receive a
one-time bonus of three times their current salary.


                                      -16-
<PAGE>


All bonuses for the years  ended June 30,  1998,  1997 and 1996 have been waived
and the  bonuses  based on income  before  taxes and  interest  have been waived
through June 30, 2000.

9.   PROFIT SHARING PLAN:

The Company's  qualified  profit sharing plan for eligible  full-time  employees
includes a 401(k) salary deferral feature that requires a matching  contribution
from the Company of up to $500 per employee for the 401(k)  feature and provides
for discretionary  profit sharing  contributions by the Company,  as approved by
its Board of  Directors.  Contribution  expense  was  approximately  $15,700 and
$6,900 for the fiscal  years ended June 30, 1998 and 1997,  respectively.  There
were no required matching contributions or authorized contributions for the year
ended June 30, 1996.

10.  INDUSTRY SEGMENTS:

Information for the Company's  distribution and  manufacturing  segments for the
years ended June 30, 1998, 1997 and 1996 is summarized as follows:

<TABLE>
<CAPTION>
                            1998                             Distribution            Manufacturing               Total
                            ----                             ------------            -------------               -----
<S>                                                         <C>                      <C>                     <C>         
Net sales                                                   $  9,571,559             $ 24,767,479            $ 34,339,038
Operating profit                                                  63,300                1,619,176               1,682,476
General corporate expenses                                          --                       --                (1,335,721)
Interest expense                                                    --                       --                  (879,406)
Net loss                                                            --                       --                  (488,485)
Identifiable assets                                            5,148,664               12,536,337              17,685,001
Capital expenditures                                              12,243                  269,593                 281,836
Depreciation and amortization expense                             61,574                  182,956                 244,530

                            1997
                            ----
Net sales                                                   $  8,081,082             $ 19,906,887            $ 27,987,969
Operating (loss) profit                                         (155,685)                 874,739                 719,054
General corporate expenses                                          --                       --                (1,430,135)
Interest expense                                                    --                       --                  (680,749)
Net loss                                                            --                       --                (1,391,830)
Identifiable assets                                            4,408,928                9,631,661              14,040,589
Capital expenditures                                              81,570                  993,792               1,075,362
Depreciation and amortization expense                             62,893                   81,713                 144,606

                            1996
                            ----
Net sales                                                   $  9,094,046             $ 17,888,653            $ 26,982,699
Operating profit                                                 133,760                2,124,131               2,257,891
General corporate expenses                                          --                       --                (1,411,495)
Interest expense                                                    --                       --                  (836,359)
Net income                                                          --                       --                    10,037
Identifiable assets                                            5,182,514                7,289,591              12,472,105
Capital expenditures                                              43,704                   49,570                  93,274
Depreciation and amortization expense                             58,941                   75,349                 134,290
</TABLE>

11.  LITIGATION:

At June 30, 1998, the Company is a defendant in  approximately  1,100  lawsuits,
together with a multitude of other  defendants,  in actions alleging exposure by
approximately  3,000 first party plaintiffs to asbestos and products  containing
asbestos sold by the Company over unspecified periods of time.


                                      -17-
<PAGE>


To June 30,  1998 and since  1981,  the Company  estimates  approximately  1,700
actions on behalf of  approximately  10,000  first  party  plaintiffs  have been
instituted against it concerning  asbestos-related claims and that approximately
650  actions  and  the  claims  of  approximately  7,000  plaintiffs  have  been
terminated   (the  foregoing   numbers  assume  the   consummation   of  pending
settlements). The Company estimates that, with the exception of defense costs, a
total of approximately $1,800,000 has been agreed to in settlements to date with
regard to the  terminated  actions of which all but $35,000 has been paid by the
Company's insurance  carriers.  To June 30, 1998, the Company has paid less than
$37,000  for legal and  defense  costs to  counsel  appointed  by the  insurance
companies to defend it. The Company  entered into an agreement  with its primary
insurance  companies,  wherefore  its liability is limited to 12% of the cost of
the defense liability and 17% of the settlement claim of certain litigation. The
agreement,  which is subject to policy limitations on each insurance policy, may
be  terminated  at any time upon 90 days notice by any of the  parties  provided
that termination may not be effective as to any asbestos action that has already
been placed on the trial  calendar,  unless it has a  scheduled  trial date more
than 12  months  from the date the  notice is given.  In May 1991,  the  Company
reached an  agreement  with Mount  Vernon  Fire  Insurance  Company,  one of its
primary  insurance  carriers,  with  respect to its pending and future  asbestos
litigation.  Mount Vernon  agreed to contribute  6.25% to the Company's  defense
costs and 6.25% to its indemnity  costs for so long a period of time as $100,000
in aggregate has not been paid for indemnity costs.  This agreement applied only
during the period Mount Vernon provided  insurance  coverage,  which was between
April 1, 1968 and April 1, 1969.  However,  because past results of  settlements
and defense  costs are not  necessarily  indicative  of future  settlements  and
defense costs and because, as of this date,  management is still unable to fully
ascertain the extent of insurance  coverage,  neither  management nor counsel is
able to  predict  the  outcome of these  matters  or the range of any  potential
liability  that might result.  In addition,  based on past  history,  management
believes it is likely that there will be additional  asbestos action against the
Company.

The  Company  is party to other  product  liability  litigation  arising  in the
ordinary course of business.

After  consultation  with  counsel,  the  Company  considers  that its  ultimate
liability,  if any, after available insurance coverage, in the majority of these
matters,  would not have a material adverse effect upon the Company's  financial
position.  However,  there can be no  assurances  that the  Company's  insurance
coverage will  adequately  cover these cases or whether the Company's  insurance
will provide coverage for punitive damages should they be awarded.

12.  ACQUISITION OF GLOVE MANUFACTURING:

In  April  1997,  the  Company,  through  Eastco  Glove  Technologies,  Inc.  (a
newly-formed,   wholly-owned  subsidiary)  acquired  all  the  common  stock  of
Protective Knitting, Inc. ("PKI") and certain machinery, equipment and inventory
from a company related to PKI. The purchase price was approximately  $1,387,000,
which has been recorded as follows:

         Inventory                                                  $    139,000
         Machinery and equipment                                         794,000
         Excess of cost over net assets acquired                         454,000
                                                                    ------------
                                                                    $  1,387,000
                                                                    ============

In connection with this purchase,  the Company borrowed  $440,000 from Congress,
(see Notes 6b, 6c and 6d),  issued  100,000 shares of its common stock valued at
approximately  $412,000  and has  agreed to make  additional  payments  to PKI's
former  owners  over  the next  three to five  years  which  aggregate  at least
$240,000 (see Note 6d). The remaining  purchase price,  including  closing costs
was  paid  in  cash.  The  acquisition  has  been  accounted  for as a  purchase
transaction. The operations of PKI prior to its acquisition were not material in
relation to those of the Company.



<PAGE>


                                                                     SCHEDULE II


                 EASTCO INDUSTRIAL SAFETY CORP. AND SUBSIDIARIES

                        VALUATION AND QUALIFYING ACCOUNTS

                        (rounded to the nearest thousand)

                    YEARS ENDED JUNE 30, 1998, 1997 AND 1996

<TABLE>
<CAPTION>


             Column A                          Column B              Column C         Column D       Column E
------------------------------------------------------------------------------------------------------------------
                                                                    Additions
                                              Balance at        Charged to costs    Deductions -     Balance at
           Description                    beginning of period       and expenses     describe (1)    end of period
------------------------------------------------------------------------------------------------------------------
             1998
             ----
<S>                                            <C>                  <C>              <C>              <C>     
Allowance for doubtful accounts                $219,000             $ 52,000         $ 86,000         $185,000
------------------------------------------------------------------------------------------------------------------
             1997
             ----

Allowance for doubtful accounts                $155,000             $105,000         $ 41,000         $219,000
------------------------------------------------------------------------------------------------------------------
             1996
             ----

Allowance for doubtful accounts                $304,000             $106,000         $255,000         $155,000
------------------------------------------------------------------------------------------------------------------
</TABLE>


(1)  Deductions  relate  to  uncollectible  accounts  charged  off to  valuation
     accounts, net of recoveries.

This schedule should be read in conjunction with the  accompanying  consolidated
financial statements and notes thereto.

Item 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
          ACCOUNTING AND FINANCIAL DISCLOSURE

     Reference is made to Item 4 of the Form 8-K dated June 4, 1998 and filed by
EDGAR on June 4, 1998 which is incorporated by reference herein.

                                    PART III

Item 10, Item 11, Item 12 and Item 13 (DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT,EXECUTIVE  COMPENSATION,  SECURITY  OWNERSHIP  OF CERTAIN  BENEFICIAL
OWNERS AND  MANAGEMENT,  and CERTAIN  RELATIONSHIPS  AND  RELATED  TRANSACTIONS,
respectively), will be incorporated in the Company's Proxy Statement to be filed
within 120 days of June 30, 1998 and will be incorporated herein by reference.


                                       23
<PAGE>

Item 14.  EXHIBITS AND REPORTS ON FORM 8-K

     (a) The following  exhibits are  incorporated by reference to the Company's
Registration Statement on Form SB-2 (No. 333-09517),  as filed on August 2, 1996
and as amended:

Exhibit       Description of Exhibit
-------       ----------------------

1.01          Form of Standby Agreement (with Royce Investment Group Inc.)

3.01          Certificate of Incorporation, as amended

3.01.1        Certificate  of Amendment to Certificate  of  Incorporation  filed
              August 12, 1996

3.01.2        Certificate  of Amendment to Certificate  of  Incorporation  dated
              February 15, 1989

3.02          By-Laws

3.02.1        Amendments to By-Laws adopted September, 1996

4.01          Form of Common Stock Certificate

4.05          Form of Class B Warrant Certificate (filed as Exhibit 4.04)

4.06          Form of Warrant Agency  Agreement for Class B Warrants between the
              Registrant  and American  Stock  Transfer and Trust Co.  (filed as
              Exhibit 4.05)

4.07          Form of Underwriters  (Royce  Investment Group Inc.) Warrant filed
              as Exhibit 4.06)

10.01         Employment Agreement with Alan Densen, dated as of July 1, 1995

10.02         Employment  Agreement  with Lawrence  Densen,  dated as of July 1,
              1995

10.03         Employment Agreement with Anthony Towell, dated as of July 1, 1995

10.05         Amendment to Financing Agreements with Congress dated July, 1996

10.07         Form of Modification  Agreement to Employment Agreements with Alan
              Densen, Lawrence Densen and Anthony Towell and Waiver

99.01         1996 Incentive Stock Option Plan as amended to date

99.02         1996 Non-Qualified Stock Option Plan as amended to date

99.03         Form of Warrants  held by Anthony  Towell  dated  January 31, 1994
              (and whose exercise date has been extended to April 30, 1999)


                                       24
<PAGE>

99.04         Form of Option Agreements Granted as of January 20, 1995 with Alan
              Densen, Anthony Towell and Lawrence Densen

99.06         Product liability primary insurance coverage for asbestos

99.07         Product liability excess insurance coverage for asbestos

99.08         Insurance  coverage for Puerto Rico Safety  Equipment  Corporation
              for asbestos

99.09         Defense and indemnity agreement dated March 26, 1990

99.10         Defense and indemnity agreement dated May, 1991

99.11         Letters between L'Abbate & Balkan, counsel for Eastco and Wilentz,
              Goldman  &  Spitzer,  counsel  for  plaintiffs'  attorneys,  dated
              February 3, 1994 and March 14, 1994, respectively, with respect to
              settlement of New York cases



                                       25
<PAGE>

     The  following  exhibits are  incorporated  by  reference to the  Company's
annual reports on Form 10K for the periods indicated:

For the year ended June 30, 1991:
---------------------------------

10.04         Accounts  Financing  Agreement  (Security  Agreement),   Covenants
              Supplement to Accounts Financing Agreement  (Security  Agreement),
              Inventory  Loan  Agreement and  Inventory  and Equipment  Security
              Agreement  Supplement to Accounts  Financing  Agreement  (Security
              Agreement)  executed as of October 1, 1991 with Congress (filed as
              Exhibit 10.1)

For the year ended June 30, 1993:
---------------------------------

10.06         Exemption of Puerto Rico Safety Corporation with respect to Puerto
              Rico taxes as amended to date


     The following  exhibits are  incorporated by reference to the  Registration
Statement on Form S-1 (No.  33-74988) as amended,  effective April 12, 1994. The
number in parentheses refers to the exhibit number in the Form S-1:

4.03          Form of Class A Warrant Certificate (4b)

4.04          Form of Warrant Agency Agreement  between the Company and American
              Stock Transfer and Trust Co. (4c)

     The following  exhibits are incorporated by reference to the Company's form
10-QSB for the quarterly period ended March 31, 1997:


10.01.1       Modification  to  employment  agreement  with Alan E. Densen dated
              March 1, 1997.

10.02.1       Modification  to employment  agreement with Lawrence  Densen dated
              March 1, 1997.

10.03.1       Modification to employment  agreement with Anthony P. Towell dated
              March 1, 1997.

10.08         Stock Exchange  Agreement  among Eastco Glove  Technologies  Inc.,
              Eastco Industrial  Safety Corp.,  Steven Robins and Phillip Robins
              dated April 17, 1997.

10.09         Asset Purchase  Agreement among PR Industries Inc., Steven Robins,
              Phillip  Robins,   Eastco  Glove   technologies  Inc.  and  Eastco
              Industrial Safety Corp., dated April 17, 1997.

10.10         Voting Trust agreement among Eastco  Industrial Safety Corp., Alan
              E. Densen,  Anthony P. Towell,  Lawrence Densen, Steven Robins and
              Phillip Robins dated April 17, 1997.

10.11         Employment  agreement with Arthur  Wasserspring  dated February 1,
              1997.

10.12         Employment agreement with Richard Boyen dated February 1, 1997.

10.13         Amendment #8 to Financing Agreements with Congress Financial Corp.
              dated April 17, 1997.

     The following exhibits are annexed hereto:

21.01         Subsidiaries of the Registrant

27.01         Financial Data Schedule

99.05         Asbestos Litigation as of June 30, 1998



(b) A report on Form 8-K, Item 4 Changes in Registrant's  Certifying  Accountant
dated June 4, 1998 was filed  during the last  quarter of the fiscal  year ended
June 30, 1998.


                                       26
<PAGE>

                                SIGNATURES

     In accordance  with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                              EASTCO INDUSTRIAL SAFETY CORP.


                                By: /S/ LAWRENCE DENSEN            Date: 10/2/98
                                   ---------------------------
                                        LAWRENCE DENSEN
                                        President and Chief Executive Officer


                                By: /S/ ARTHUR J. WASSERSPRING     Date: 10/2/98
                                   ---------------------------
                                        ARTHUR J. WASSERSPRING
                                        Vice President of Finance, and
                                        Chief Financial Officer

     In  accordance  with the Exchange  Act,  this report has been signed by the
following  persons on behalf of the  registrant and in the capacities and on the
dates indicated.

                                By: /S/ LAWRENCE DENSEN            Date: 10/2/98
                                   ---------------------------
                                        LAWRENCE DENSEN
                                        Director


                                By: /S/ ALAN DENSEN                Date: 10/2/98
                                   ---------------------------
                                        ALAN DENSEN
                                        Director

                                By: /S/ CHARLES HOLZBERG           Date: 10/2/98
                                   ---------------------------
                                        CHARLES HOLZBERG
                                        Director

                                By: /S/ MARTIN FLEISHER             Date:10/2/98
                                   ---------------------------
                                        MARTIN FLEISHER
                                        Director

                                By: /S/ ANTHONY P.TOWELL           Date: 10/2/98
                                   ---------------------------
                                        ANTHONY P. TOWELL
                                        Director

                                By: /S/ JAMES A. FAVIA             Date: 10/2/98
                                   ---------------------------
                                        JAMES A. FAVIA
                                        Director

                                By: /S/ BRUCE FRIEDMAN             Date: 10/2/98
                                   ---------------------------
                                        BRUCE FRIEDMAN
                                        Director


                                       27