SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549


                           FORM 10-K and ANNUAL REPORT
            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 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. 0-795


                            BADGER PAPER MILLS, INC.
             (Exact name of registrant as specified in its charter)


         200 West Front Street                              WISCONSIN
              P.O. Box 149                          (State of incorporation)
     Peshtigo, Wisconsin 54157-0149                        39-0143840
(Address of principal executive office)                (I.R.S. Employer 
                                                      Identification Number)

       Registrant's telephone number, including area code: (715) 582-4551

        Securities registered pursuant to Section 12(b) of the Act: None

           Securities registered pursuant to Section 12(g) of the Act:
                   Common Stock, Without Nominal or Par Value

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

Indicate by 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 the 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]

As of March 23, 1999, 1,963,764 shares of common stock were outstanding, and the
aggregate market value of the common stock (based upon the closing sale price of
the  shares  on  the  Nasdaq  National  Market)  held  by   non-affiliates   was
approximately  $14,052,695.  Determination  of stock ownership by affiliates was
made solely for the purpose of responding to this requirement, and registrant is
not bound by this determination for any other purpose.

                       DOCUMENTS INCORPORATED BY REFERENCE
The Company's  Proxy Statement for its 1999 Annual Meeting of Shareholders to be
filed  with the  Commission  under  Regulation  14A is  herein  incorporated  by
reference  into Part III of this Form 10-K to the extent  indicated  in Part III
hereof.


<PAGE>


Statement Regarding Forward-Looking Information

This Form 10-K, each of the Company's annual report to  shareholders,  Forms 8-K
and 10-Q, proxy  statements,  and any other written or oral statement made by or
on behalf of the Company  subsequent to the filing of this Form 10-K may include
one or more  "forward-looking  statements" within the meaning of Sections 27A of
the  Securities  Act of 1933 and 21E of the  Securities  Exchange Act of 1934 as
enacted in the Private  Securities  Litigation  Reform Act of 1995 (the  "Reform
Act").  In making  forward-looking  statements  within the meaning of the Reform
Act, the Company  undertakes no obligation to publicly update or revise any such
statement.

Forward-looking  statements of the Company are based on information available to
the  Company  as of the  date of  such  statements  and  reflect  the  Company's
expectations  as of such date, but are subject to risks and  uncertainties  that
may cause actual  results to vary  materially.  In addition to specific  factors
which may be described in connection  with any of the Company's  forward-looking
statements,  factors  which  could  cause  actual  results to differ  materially
include, but are not limited to the following:


o     Increased  competition  from either domestic or foreign paper producers or
      providers of alternatives to the Company's  products,  including increases
      in  competitive  production  capacity,  resulting in sales  declines  from
      reduced  shipment  volume  and/or  lower  net  selling  prices in order to
      maintain shipment volume.

o     Changes  in demand for the  Company's  products  due to  overall  economic
      activity  affecting  the  rate  of  consumption  of  the  Company's  paper
      products,  growth  rates of the end  markets for the  Company's  products,
      technological or consumer preference changes or acceptance of the products
      by the markets served by the Company.

o     Changes in the price of pulp, the Company's main raw material.  All of the
      Company's  pulp needs are  purchased on the open market and price  changes
      for pulp have a  significant  impact on the  Company's  costs.  Pulp price
      changes  can  occur due to  worldwide  consumption  levels  of pulp,  pulp
      capacity  additions,  expansions or  curtailments  affecting the supply of
      pulp, inventory building or depletion at pulp consumer levels which affect
      short-term  demand,  and  pulp  producer  cost  changes  related  to  wood
      availability, environmental issues, or other variables.

o     Unforeseen operational problems at any of the Company's facilities causing
      significant lost production and/or cost issues.

o        Changes in laws or regulations which affect the Company.


                                       2
<PAGE>

<TABLE>

  Five-Year Comparison of Selected Financial Data

<CAPTION>
                                                                          Year ended December 31
                                                       1998           1997           1996           1995           1994
<S>                                                <C>            <C>            <C>            <C>            <C>      
Earnings (in thousands):
   Net sales                                         $65,727        $70,427        $76,276        $92,648        $73,674
   Cost of sales                                      58,505         67,600         72,411         83,890         72,949
   Gross profit                                        7,222          2,827          3,865          8,758            725
   Selling and administrative expenses                 4,331          4,085          4,136          3,852          3,872
   Restructuring provision                                 -            850          7,430            504              -
   Pulp mill impairment charge                             -            783              -              -              -
   Profit (loss) from operations                       2,891         (2,891)        (7,701)         4,402         (3,147)
   Other income                                          946            650          4,842            414          1,068
   Interest expense                                    1,196          1,354            894          1,305          1,315
   Unrealized holding gain or (loss)
      on trading securities                                -              -            307            549           (846)
   Earnings (loss) before income taxes                 2,641         (3,595)        (3,446)         4,060         (4,240)
   Income tax expense (benefit)                          897         (1,153)        (1,234)         1,312         (1,713)
   Net earnings (loss)                                 1,744         (2,442)        (2,212)         2,748         (2,527)

Common stock:
   Number of shareholders of record                      470            515            518            568            613
   Weighted average shares outstanding             1,955,772      1,947,128      1,944,699      1,953,868      1,957,163
    Earnings (loss) per share                          $0.89         $(1.25)        $(1.14)         $1.41         $(1.29)
    Cash dividends declared per share                      -         $    -         $ 0.22          $0.10         $    -
    Book value per share                               $9.33         $ 8.42         $ 9.68         $11.04         $ 9.77

Financial position (in thousands)
    Working capital                                   $7,346         $7,196         $9,923        $10,459        $(1,276)
   Capital expenditures                                3,004          4,686          6,856          2,705          1,654
   Total assets                                       47,999         48,356         51,952         52,578         54,382
   Long-term debt                                     16,126         20,394         18,617         17,236         10,651
   Shareholders' equity                               18,257         16,444         18,832         21,443         19,120
</TABLE>


                                       3
<PAGE>

PART I

Item 1.  Business

Badger Paper Mills, Inc.  ("Badger" or the "Company") was incorporated under the
laws of the State of Wisconsin in 1929. It has been producing  paper for over 69
years. The industry segment in which the Peshtigo, Wisconsin paper mill operates
is in the production of paper products.  The Oconto Falls, Wisconsin facility is
operated by the Company's Badger Paper Flexible Packaging Division subsidiary in
the printing and converting industry segment.

Products and Distribution

Badger  operates  an ISO 9001  certified  paper  mill,  consisting  of two paper
machines located in Peshtigo, Wisconsin. Converting facilities contiguous to the
papermaking facilities include punching equipment,  sheeters, trimmers, sealers,
perforators, rewinders, waxers, paper drilling and die-cutting equipment. Badger
also has a wholly-owned flexographic printing and converting operation in Oconto
Falls, Wisconsin.

The products produced on Badger's  Fourdrinier machine represented 78 percent of
the paper products  manufactured  by the Company in 1998, and  contributed  more
than 68  percent of 1998  revenue  from the sale of paper  products.  Fine paper
grades are produced utilizing fiber purchased on the open market,  including pre
and post consumer  recycled  fibers.  These paper grades  include  multi-purpose
business papers,  offset,  opaque,  endleaf,  ledger,  reply card,  watermarked,
water-oil-grease resistant papers (WOGR),  electrostatic copier, text and cover,
and technical and specialty papers. Badger offers a wide range of colored papers
and  specializes  in color  matching.  Badger sells a portion of these  products
under certain trademarks and trade names, including  Ta-Non-Ka(R),  Copyrite(R),
ENVIROGRAPHIC(R), Northern Brights(R), Artopaque(R) and Marks of Distinction(R).
These  products  are sold  through  paper  merchants,  brokers  and  value-added
converters  who in turn  sell to other  value-adding  entities  or direct to the
consumer.  Consumers  of Badger fine paper  products  can be found in  principal
cities throughout North America.

The  Company's  Yankee  machine  produced  22  percent  of  the  paper  products
manufactured by Badger in 1998, representing 32 percent of the 1998 revenue from
the sale of paper products. These products consist of converted plain or printed
waxed papers, laminating grades, machine-glazed,  colors,  specialty-coated base
papers,  twisting papers and various other specialty papers.  These products are
sold nationally and  internationally to manufacturers,  consumers and converters
by Badger's own sales personnel and commissioned brokers.

Badger Paper  Flexible  Packaging  Division  operates a printing and  converting
facility that compliments  Badger's  packaging paper products.  The Oconto Falls
facility  is  capable of  processing  various  substrates  of film and paper and
enhances the capabilities of the Peshtigo packaging paper operations,  resulting
in  opportunities  to expand  business  growth for both.  The facility  also has
rewinding and polyethylene  bag making  equipment.  Oconto Falls  contributed 10
percent of the consolidated revenues in 1998.


                                       4
<PAGE>


Competition

Badger's  manufactured  paper products are highly  sensitive to competition from
numerous  sources,   including  other  paper  products  and  products  of  other
composition.  Product  quality,  price,  volume and service are all  competitive
factors.

Badger's production of fine papers from the Fourdrinier paper machine represents
less  than  one  percent  of  the  production  capacity  in the  United  States.
Competition  for these papers comes from other  specialty mills in North America
and  imports  from other  countries.  Competition  for  flexible  packaging  and
specialty  papers  produced  from the  Yankee  paper  machine  comes  from other
specialty mills; some of the mills are similarly  constituted as Badger,  others
have greater  capacity.  Backlogs are maintained by offering  quality  products,
prompt service and technical  assistance,  including a research and  development
program to develop new products to meet customer product design specifications.

Inventories; Raw Materials

Badger's  principal  raw material used for  papermaking  operations is purchased
pulp.  Badger utilizes a variety of fibers to meet the formulation  requirements
of the  papers  it  produces.  Pre-consumer  and  post-consumer  recycled  pulp,
northern and southern  softwood and hardwood pulps, and hard white rolls make up
the total fiber  requirements.  Since the closure of it's sulphite mill in 1996,
Badger has purchased all its fiber requirements on the open market.

Other raw materials are purchased  directly from manufacturers and distributors.
Badger  has at least  two  sources  of  supply  for major  items.  Shortages  of
purchased pulp or certain  chemicals  (including  petrochemicals)  could have an
adverse  effect on  Badger's  ability to  manufacture  its  products,  and could
adversely affect product mix.

The Flexible Packaging Division's primary raw materials are paper,  polyethylene
and printing inks.  They are purchased  directly from  manufacturers,  including
paper purchases from the Peshtigo mill.

In-process  and finished  goods  inventory at the end of 1998 was  equivalent to
approximately 38 days of production.

Energy

Badger is a large consumer of electricity and natural gas. Prior to 1997, Badger
utilized an on-site 2,000 kilowatt electrical  co-generation system. However, as
a result  of  Badger's  restructuring  during  1996 and 1997,  production  steam
requirements  declined  to a point where it has become  more cost  effective  to
purchase  its  entire  electrical  requirements.   Badger's  current  electrical
requirements   are  purchased  from  local  public   utilities.   Badger's  heat
requirements are supplied by two dual-fueled  boilers capable of burning natural
gas or fuel oil,  and one  natural gas boiler.  Natural  gas is  purchased  from
various  sources in the United States and Canada.  Management  believes  current
sources of natural gas, fuel oil and  electricity  are adequate to meet Badger's
needs.


                                       5
<PAGE>


Patents

Badger owns certain  patents and licenses used in connection  with its business,
none of which are individually considered material to its business.

Research and Development

Badger's technical staff researches and develops new products,  although outside
consultants  are  utilized  from  time to time.  The  amounts  spent on  product
research and development  activities were $2,971,000 in 1998, $5,287,00 in 1997,
and  $862,000 in 1996.  The  significant  increase in research  and  development
expenditures  in  1997  was  directed  to  new  product  introductions  and  the
development  of specialty  products  designed to meet the needs of our customers
and the industry.

Backlog

As  of  December  31,  1998,   Badger's  backlog  of  orders  was  approximately
$2,106,000, as compared to $3,550,000 and $875,000 at December 31, 1997 and 1996
respectively.  Soft market  conditions  that existed at the end of each of these
years allowed our customers to order closer to their actual needs.

Customers

In 1998 and 1997,  no  customers  represented  over 10 percent of  Badger's  net
sales. Sales to a paper products operating segment customer were $12,030,000, or
15.8 percent of Badger's net sales, in 1996.

Environmental Matters

In August,  1997, the Wisconsin  Department of Natural Resources (WDNR) met with
Badger to discuss  finalization of the Title V Air Operating  Permit at Badger's
Peshtigo,  Wisconsin  facility.  Since that date,  substantial changes have been
made to  Peshtigo's  operation.  A joint meeting with the WDNR and Dames & Moore
(contracted  environmental  engineering  firm) to discuss the  modifications  at
Badger is  scheduled  in the  second  quarter of 1999.  Compliance  with the new
requirements is expected.

All effluent flow from Badger's  Peshtigo  operations is directed into the joint
municipal waste water treatment plant, which Badger operates under contract with
the City of Peshtigo.  The water treatment plant continues to meet or exceed all
applicable environmental requirements.

Negotiations  continue with the WDNR regarding final closure cover of the Harbor
Road landfill.  Badger and the WDNR have discussed  various proposals and expect
final  resolution  to the closure  proposal in 1999.  The costs  related to such
closure are expected to be within the amount reserved for such closure.

Badger Paper Flexible Packaging Division in Oconto Falls,  Wisconsin,  currently
complies with its air operating permit.

Badger has in force all of the  necessary  environmental  permits from  federal,
state and local authorities, and does not anticipate any problem with reissuance
of any permits.


                                       6
<PAGE>


Employees

As of December 31, 1998, the Company had 295 employees.  Of the 248 employees at
the  Peshtigo  facility,  184 were  covered by  six-year  collective  bargaining
contracts  running  through  May 2001.  The  Oconto  Falls  facility  employs 47
personnel, none of whom are covered by a collective bargaining contract.

Item 2.   Properties

The Company  considers  its  manufacturing  facilities  to be in good repair and
suitable for the purpose intended.

The Company's  approximately  3,750 square foot  headquarters and  approximately
88,500  square  foot paper  manufacturing  facility  are  located  in  Peshtigo,
Wisconsin.  Badger Paper  Flexible  Packaging  Division's  approximately  40,000
square foot facility is located in Oconto Falls, Wisconsin.

Item 3.   Legal Proceedings

The Company has no pending material legal proceedings.

Item 4.   Submission of matters to a vote of security holders

No matters were submitted to a vote of security holders in the fourth quarter of
1998.


PART II

Item 5. Market for the  registrant's  common stock and related  security  holder
matters.

Badger Paper Mills,  Inc. common shares are traded on the Nasdaq National Market
under the symbol BPMI.  There were 455 registered  shareholders  of record as of
March 23, 1999. Stock price and dividend information is found on page 37 of this
report.

Item 6.   Selected financial data

Information  regarding  selected  financial  data of the Company is presented on
page 3 of this report.

Item 7. Management's  discussion and analysis of financial condition and results
of operations

Result of Operations

Review of Operations

1998 began with the layoff of 71 employees, or 23.5 percent of the workforce, as
the Company  implemented the  restructuring  of its  operations.  The underlying
strategy of the  restructuring  was to continue to accept  orders at  profitable
margins, and to incur downtime when profit margins did not allow full operation.
New  product  development  was a focal  point  in 1998 as part of the  long-term
strategy  of  trending  away from  commodity  type  grades and moving  sales and
products toward specialty, niche grades.

                                       7
<PAGE>

Significant  success in new product  development  contributed  to  attaining  an
average of 53 percent  specialty  grades  sales  dollars in 1998  compared to 37
percent in 1997.  Development of oil and grease resistant papers, lighter weight
printing  papers,  high-end  laser  papers  and  coated  packaging  papers  also
contributed to the increased level of specialty business in 1998.

The year was  difficult  for  employees  because of the speed and  magnitude  of
change  introduced  in Badger's  operations  as the business was  revamped.  The
required changes were completed  successfully  based, to a large extent,  on the
hard work and skill  levels of the  entire  production  staff.  Throughout  this
period,  accident rates were at all time lows; rejections from customers were at
all time lows, and most production equipment operated at higher production rates
compared  to  previous  years.  Investments  were  made to  contribute  to these
accomplishments, but the underlying strength of our business is directly tied to
the character and integrity of our employees.

The operations  group continues to concentrate on safety and quality in 1999. As
the business grows and more specialty grades are developed, the operations group
will focus on quicker grade changes,  reducing waste,  improving the flexibility
of the paper machines and the capabilities of the converting equipment.

1998 vs. 1997

In 1998 sales decreased  $4,700,000 or 7 percent to $65,727,000 from $70,427,000
during 1997. Weak market conditions continued in the industry, especially in the
commodity  market.  This  resulted  in a decline  of 11 percent in the volume of
shipments.  The average  selling  price  increased  slightly  despite the volume
decrease,  primarily due to increased  percentage of higher margin products sold
in 1998.  Specialty  products increased to approximately 53 percent of our gross
sales dollars in 1998 from 37 percent in 1997.

Cost of sales of $58,505,000 for 1998 decreased by $9,095,000 or 13 percent from
$67,600,000  in  1997.  This  reduction  was the  result  of a 12%  decrease  in
production  due to the weak market  conditions in 1998. Our strategy was to take
downtime when market conditions  warranted,  versus running low margin commodity
products.   Cost   reductions  were  also  achieved  by  the  reduction  of  our
administrative and production  workforce by approximately 71 employees.  We also
experienced  declining  prices  for the cost of  purchased  fiber  during  1998.
Production  rates at the  Peshtigo  facility  were at record  levels,  while the
start-up  of  the  new  Chadwick  printing  press  at  the  Oconto  Falls  plant
experienced some difficulties.  These problems were resolved with the efforts of
engineering staffs at both facilities during the fourth quarter of 1998.

Gross profit in 1998 improved to $7,222,000  from  $2,827,000  reported in 1997.
This primarily is a result of  concentrating  on higher profit margin  specialty
products. Workforce reductions and cost saving initiatives that were implemented
on the manufacturing floor also contributed to the higher gross profit.

Selling and  administration  expenses  increased $246,000 to $4,331,000 in 1998.
The additional  expenses were in part associated with  development  costs in the
specialty market and consultants providing professional services relative to our
product restructuring during 1998.

The Company recorded a second quarter  non-recurring capital gain of $611,000 on
the sale of its offsite training facility. Additionally, non-recurring executive
termination  expenses  of  $286,000  associated  with the

                                       8
<PAGE>

resignations  of the Company's  former  President and Vice  President  were also
recorded in the second quarter of 1998.

Interest  expense  during 1998  decreased 12 percent to  $1,196,000  compared to
$1,354,000 in 1997. The decrease in interest  expense was  attributable to lower
average  borrowings  under the Company's  revolving  credit  facility.  Badger's
effective  tax rate was a 34  percent  provision  in  1998,  compared  to a 32.1
percent benefit for the year 1997.

The Flexible Packaging Division,  which contributed  approximately 10 percent to
the consolidated revenue of Badger, was profitable.


1997 vs. 1996

Net sales for 1997 of $70,427,000  compared to $76,276,000  reported in 1996, or
an 8 percent decrease. Weak market conditions have existed in the industry since
the third quarter of 1995. This resulted in a decline of 4 percent in the volume
of shipments,  10 percent higher  production  downtime and a decrease in average
selling price of 5 percent for 1997 when compared to a year earlier.

Cost of sales for 1997 decreased 7 percent to $67,600,000  from  $72,411,000 for
1996.  Production from operations decreased 5 percent in 1997 when compared to a
year  earlier  due  to  machine  downtime   scheduled  because  of  soft  market
conditions.  The cost of purchased fiber remained  relatively  stable throughout
1997  and  equaled  the  cost  incurred  during  1996.  Energy,   operating  and
maintenance  supplies,  and environmental  expenses  decreased 19 percent from a
year  earlier due to the closure of  Badger's  pulp mill in May 1996,  and lower
energy costs and cost reduction  initiatives  realized  during 1997.  Costs were
impacted  in 1997 by  $5,287,000  of  research  and  product  development  costs
compared with $862,000 for 1996. The increased  spending  related to development
of  new  manufacturing  techniques,  new  products  and  new  applications  that
management  believed  were  necessary to  implement  the  Company's  strategy to
transition  from a producer of commodity  products and reposition  itself in the
marketplace as a specialty products manufacturer.

Gross  margins for 1997 of  $2,827,000  compared to  $3,865,000 a year  earlier,
reflecting  impact of the soft market  conditions  which existed  throughout the
year. Selling and  administrative  expenses totaled $4,085,000 and $4,136,000 in
1997 and 1996, respectively.

Badger   recorded  a  charge  of  $850,000  in  1997  in   recognition   of  the
discontinuance  of  manufacturing  certain  products and  elimination of certain
converting operations.  Badger also recorded a 1997 charge of $783,000 primarily
related to the remaining unsold assets from the May 1996 pulp mill closure.

Plas-Techs (now known as Badger Paper Flexible Packaging  Division)  contributed
approximately 7 percent to the consolidated revenue of Badger and was profitable
for each of the years 1997 and 1996.

Interest expense for 1997 totaled $1,354,000  compared to $894,000 for 1996. The
increase in interest expense was attributable to higher average borrowings under
the Company's revolving credit facility.  Badger's effective tax rate was a 32.1
percent benefit for 1997 compared to a 35.8 percent benefit for the year 1996.

                                       9
<PAGE>

Liquidity and Capital Resources

Capital Expenditures

Capital  expenditures for 1998 totaled $3,004,000 compared to $4,686,000 in 1997
and  $6,856,000  in 1996.  Depreciation  totaled  $2,752,000 in 1998 compared to
$2,790,000 and $2,743,000 in 1997 and 1996, respectively.

Major capital  projects  during 1998 included the metalizing of the Yankee dryer
surface, installation of helper drives on both paper machines, installation of a
cross direction  moisture control system on the Yankee paper machine,  and a wax
plant ramp and enclosure at Peshtigo.  A Chadwick eight-color central impression
flexographic  press  was also  installed  at  Badger  Paper  Flexible  Packaging
Division's  Oconto Falls facility.  The 1997 and 1996 capital spending  included
the new $7,500,000 stock preparation project at Peshtigo, which was completed in
early 1997.

In 1999,  Badger  plans to continue  investment  in  upgrading  its  facilities,
including  improvements and upgrades to both paper machines. The planned capital
expenditures  are primarily  geared toward  product  development  support in our
drive toward specialty products.

Capital Resources

In January  1999,  Badger  refinanced  its  revolving  credit  facility with its
existing  lender.  The refinanced  facility  extends through  November 2001, and
provides for borrowings up to $12,000,000.

Certain  covenants  require  Badger to  maintain a fixed  charge  ratio,  a debt
leverage ratio,  minimum tangible net worth,  provide for limitations on capital
expenditures,  and  require  the  Company  to  make  principal  payments  on its
outstanding Industrial Development Revenue Bonds. Further detail is presented in
Note F to the Company's Consolidated Financial Statements.

At December 31, 1998,  $10,200,000  was outstanding  under the revolving  credit
agreement  referenced above, a $1,200,000  decrease from the balance outstanding
at December 31, 1997.

Cash Flows

Cash provided from  operations  was $2,079,000 in 1998 and $399,000 in 1997. The
improved cash flow is attributed to the increased income generated in 1998.

Net cash  provided by  investing  activities  was  $171,000 in 1998,  which is a
substantial  improvement  over the $4,951,000 of cash used in 1997. The increase
relates to the proceeds from the sale of the Company's training facility and the
maturity of certificates of deposit. The Company also received the reimbursement
from General Electric Capital Corporation (GE Capital) of $1,572,000 advanced by
Badger in connection with the installation of the Chadwick press at the Flexible
Packaging  Division's  Oconto Falls facility.  The Flexible  Packaging  Division
entered into a nine-year  operating lease with GE Capital for the Chadwick press
on May 1, 1998.

                                       10
<PAGE>

Cash used in financing activities in 1998 was $1,323,000, compared to $1,775,000
provided in 1997.  The primary use of these funds was the reduction of long-term
debt by $2,323,000 in 1998.

Year 2000

Badger has a Year 2000  Committee  that has been  assigned  the task of assuring
Year 2000 ("Y2K") compliance for all information technology and non -IT systems.
The  Committee is committed to ensuring  Badger is Y2K compliant by September 1,
1999.

The Company's State of Readiness - Information Technology

Our internal  information  technology staff has been assigned the responsibility
of assuring Year 2000  compliance  for the Peshtigo and Oconto Falls  facilities
for all information  technology systems.  This includes the main frame computer,
personal computers,  network servers, telephone system and related software. The
staff  has  identified  and  is  testing  all  hardware  and  software  for  Y2K
compliance.  The highest priority will be assigned to hardware and software that
have date sensitive components.

Our main frame computer is Y2K compliant for its hardware and operating  system.
It is  estimated we have  completed  10 to 15 percent of  necessary  programming
changes to the business  systems to become Y2K  compliant.  We will be utilizing
outside resources to review, test and complete the required  programming changes
on the software for our business systems.

We will be using specially purchased software to test compliance on all personal
computers. It is estimated that 10 percent, or 12 of our personal computers will
have to be upgraded or replaced.  All other hardware and software will be tested
individually by our staff with support from the  manufacturer  and local service
companies.  As the systems are being  reviewed,  consideration  will be made for
upgrading and/or replacement.

Our network  servers are relatively new and we do not anticipate any hardware or
software  problems during the Y2K review process.  The phone system was upgraded
to be Y2K compliant in 1998.

The Company's State of Readiness - Non-information Technology

Our engineering staff has assigned two employees the  responsibility of assuring
Year 2000  compliance for all  manufacturing  aspects of the Peshtigo and Oconto
Falls facilities for all non-information  technology systems. All equipment that
has  computerized  process  controllers  or any date  sensitive data in computer
chips will be reviewed. This includes the paper machines,  converting equipment,
boilers,  waste treatment facilities,  printing presses, lab equipment,  and all
related  software.  The staff has  identified  and is testing all  hardware  and
software for Y2K compliance.

The  most  critical  manufacturing  equipment  for a paper  mill  are the  paper
machines themselves.  Each paper machine is controlled by an independent process
control  computer.  In 1998 we replaced the process computer on the Yankee Paper
Machine and it was made Y2K compliant by the manufacturer. The Fourdrinier Paper
machine has a replacement process computer ordered for installation in July 1999
and it will be Y2K compliant.

The new Chadwick press at our Oconto Falls facility is also Y2K compliant.

                                       11
<PAGE>

All hardware and software will be tested  individually by our staff with support
from the manufacturer and local service companies.  The highest priority will be
assigned to manufacturing  equipment that is the most critical to our operations
and to any  hardware  and  software  that have date  sensitive  components.  The
Company is surveying our key suppliers on the status of their Y2K  compliance to
assure our continued  source of raw materials and other critical  components for
our  manufacturing  process.  Their  response  to the  survey  will  be  used to
determine readiness of key suppliers.

The Costs to Address the Company's Year 2000 Issues

The Company has not incurred any additional expenses to address Y2K issues other
than normal  wages and  benefits of our IT and  engineering  staffs.  Additional
costs will be incurred  for  contract  programming  and system  upgrades  and/or
replacement. We anticipate this total cost to be less than $200,000.

As mentioned previously,  we replaced the process control computer on the Yankee
paper  machine for  $741,000,  and have ordered a  replacement  computer for the
Fourdrinier  paper  machine.  The  Fourdrinier  process  computer  has a cost of
$1,194,000,  and will be leased. While the costs are significant,  they have not
been included in the above cost estimates. In both cases , the process computers
were obsolete and had to be replaced.  There was no  acceleration of the project
due to Y2K issues.

The  telephone  system was  replaced in 1998 in order to upgrade  our  telephone
capabilities.  We have not included the costs in the above estimate  because the
replacement was not accelerated due to Y2K issues.

The Risks of the Company's Year 2000 Issues

Risks  of  the  Company   must  be  divided  by   information   technology   and
non-information technology systems.

The primary risk for  information  technology is the main frame computer and our
business system  software.  As stated  previously,  the IBM RS-6000  computer is
compliant and we have upgraded to the latest operating  system.  The risk to the
Company is that the outside  programming  resources  we intend to use to upgrade
other  business  software  may not have  adequate  staff to program in the COBOL
language used in the Company's business systems. There is also the risk they may
not  complete  their  task  per  our  schedule.  Their  priorities  will be date
sensitive  software  that  processes  data.   Current   discussions  with  these
contractors  have indicated that the required  programming  will be completed on
time.

The primary risk for non-information technology relates to our boilers and paper
machines.  Both paper machines use steam produced by the boilers.  There are two
risks  associated with the boilers -- the Y2K status of all process controls and
the availability of natural gas. We have begun to review the process controls on
the boilers to determine to what extent upgrades or replacements will be needed.
If natural gas is not  available,  the boilers  will be able to burn fuel oil to
meet all steam requirements.  As stated previously, the process computers on the
paper machines have been or are scheduled to be replaced.

At the  Flexible  Packaging  Division  the primary risk is the Y2K status of the
printing  presses.  The manufacturer of the  newly-installed  Chadwick press has
informed the Company that it is Y2K compliant.  The Company is testing the other
two presses used at this facility.


                                       12
<PAGE>

The Company's Contingency Plan

Contingency  plans will be  developed  in the second  quarter of 1999 as testing
proceeds and results are reviewed.

Risks  described  above for  information  technology can be temporarily  handled
manually.  One example would be hand typing customer invoices,  purchase orders,
payroll  checks  and  vendor  checks.  The  other  option  would  be to use less
sophisticated personal computer software on a short term basis.

Non-information  technology  risks were described  above. The primary concern is
the control of specification of our manufacturing process. This would be handled
with additional  staffing to manually control the  manufacturing  process in the
absence of computerized process controls.

In Oconto Falls we have three  printing  presses and would divert  production to
the Chadwick press, which is Y2K compliant.

Item 7A.  Quantitative and Qualitative Disclosure About Market Risk

The Company is exposed to market risk from changes in interest on its  long-term
debt. The Company's  revolving credit facility provides for borrowings up to $12
million and extends to November 2001. A commitment fee of 1/2 percent is payable
for unused amounts. Interest on borrowings is at the LIBOR rate plus 2.0 percent
(totaling 7.54 percent at December 31, 1998).

Certain of the IDRBs require aggregate  quarterly  installments of $140,000 plus
interest  beginning  March 31,  1999  through  March 31,  2002.  The  Company is
required to make a principal  payment of not less than $1,885,000 in March 1999.
Principal installments of $495,000,  $400,000 and $35,000 are due June 30, 1999,
2000  and  2001,   respectively,   and  $65,000  due  January  31,  2001.  These
installments  are in addition  to the  quarterly  installments.  Interest on the
IDRBs is payable at floating rates determined by remarketing agents (4.1 percent
at December 31, 1998).  The remaining  IDRBs are due in monthly  installments of
$5,555 plus interest through maturity in 1999.

Even though a majority of the Company's debt is at variable  interest  rates, it
is felt the Company's  exposure to interest rate  fluctuations  is immaterial to
the  consolidated  financial  statements.  A hypothetical 1 percent  increase in
interest  rates would cause an estimated  $175,000  increase in annual  interest
expense.

The Company does not use financial instruments for trading purposes and is not a
party to any leveraged derivatives.

                                       13
<PAGE>

Item 8.   Financial statements and supplementary data


                REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT





To the Board of Directors and Shareholders of
Badger Paper Mills, Inc. and Subsidiary

We have audited the  accompanying  consolidated  balance  sheets of Badger Paper
Mills,  Inc. (a Wisconsin  corporation) and Subsidiaries as of December 31, 1998
and 1997 and the related  consolidated  statements of operations,  shareholders'
equity and cash flows for the years then ended.  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 audit.  The consolidated
statement  of  operations,  shareholders'  equity and cash flows of Badger Paper
Mills,  Inc. and Subsidiaries for the year ended December 31, 1996, were audited
by other  auditors  whose report dated February 4, 1997 expressed an unqualified
opinion on those statements.

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

In our  opinion,  the 1998 and 1997  financial  statements  referred  to  above,
present fairly, in all material respects, the consolidated financial position of
Badger Paper Mills,  Inc. and  Subsidiaries as of December 31, 1998 and 1997 and
the consolidated  results of their operations and their  consolidated cash flows
for the years  then  ended in  conformity  with  generally  accepted  accounting
principles.




/s/ GRANT THORNTON LLP

Appleton, Wisconsin
January 29, 1999

                                       14
<PAGE>



                        REPORT OF INDEPENDENT ACCOUNTANTS



To the Shareholders and
     Board of Directors
Badger Paper Mills, Inc.
Peshtigo, Wisconsin 

We have audited the  accompanying  consolidated  statements  of  operations,  of
changes in shareholders'  equity, and of cash flows and the financial  statement
schedule  listed in the index of this Form 10-K of Badger Paper Mills,  Inc. and
Subsidiaries  for the year ended  December 31,  1996,  prior to the adoption and
application  of  Financial  Accounting  Standards  Board  Statement  No. 131, as
discussed in Note H. 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 audit. We have not audited the  consolidated
financial  statements  of the Company for any period  subsequent to December 31,
1996, nor have we examined any  adjustments  or disclosures  related to the 1996
information contained in Note H.

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

In our  opinion,  the  financial  statements  referred  to  above,  prior to the
adoption and application of Financial  Accounting  Standards Board Statement No.
131, as discussed  in Note H, present  fairly,  in all  material  respects,  the
consolidated  results of operations of Badger Paper Mills, Inc. and Subsidiaries
and their cash flows for the year ended  December 31, 1996, in  conformity  with
generally  accepted  accounting  principles.  In addition,  in our opinion,  the
financial  statement  schedule referred to above, when considered in relation to
the basic consolidated  financial statements taken as a whole,  presents fairly,
in all material respects, the information to be included therein.



/s/ PRICEWATERHOUSE COOPERS LLP
Milwaukee, Wisconsin
February 4, 1997

                                       15
<PAGE>


                    Badger Paper Mills, Inc. And Subsidiaries

                           CONSOLIDATED BALANCE SHEETS
                           December 31, 1998 and 1997
                             (dollars in thousands)

                                 ASSETS                      1998       1997
Current Assets
  Cash and cash equivalents                                $2,229      $1,302
  Certificates of deposit                                     996       1,382
  Marketable securities                                     1,361       1,318
  Accounts receivable, net                                  5,262       5,120
  Inventories                                               6,201       4,844
  Refundable income taxes                                      27         385
  Deferred income taxes                                     1,220       1,291
  Prepaid expenses and other                                  558         298
                                                          -------     -------
     Total current assets                                  17,854      15,940

PROPERTY, PLANT, EQUIPMENT AND TIMBERLANDS, NET            27,291      29,287
  
OTHER ASSETS
  Trade credits                                               696         996
  Other                                                     2,158       2,133
                                                          -------     -------
                                                            2,854       3,129
     Total assets                                         $47,999     $48,356
                                                          =======     =======

                             LIABILITIES
  
CURRENT LIABILITIES
  Current portion of long-term debt                        $3,068        $123
  Accounts payable                                          3,913       4,313
  Accrued liabilities                                       3,357       4,308
  Income taxes payable                                        170           -
                                                          -------     -------
     Total current liabilities                             10,508       8,744

LONG-TERM DEBT                                             16,126      20,394
  
DEFERRED INCOME TAXES                                       1,700       1,185
  
OTHER LIABILITIES                                           1,408       1,589

COMMITMENTS AND CONTINGENCIES                                  -           -

SHAREHOLDERS' EQUITY
  Common stock, no par value; 4,000,000 
     shares authorized, 2,160,000 shares issued             2,700       2,700
  Additional paid in capital                                  200         190
  Retained earnings                                        17,296      15,552
  Treasury stock, at cost, 199,278 and 208,145
     shares in 1998 and 1997, respectively                 (1,939)     (1,998)
                                                          -------     -------
     Total shareholders' equity                            18,257      16,444
                                                          -------     -------
     Total liabilities and shareholders' equity           $47,999     $48,356
                                                          =======     =======

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

                                       16
<PAGE>

<TABLE>
                            Badger Paper Mills, Inc. and Subsidiaries
                              CONSOLIDATED STATEMENTS OF OPERATIONS
                       For Years Ended December 31, 1998, 1997 and 1996
                        (dollars in thousands, except per share data)
<CAPTION>
                                                       1998             1997              1996
<S>                                                   <C>              <C>              <C>    
Net sales                                             $65,727          $70,427          $76,276

Cost of sales                                          58,505           67,600           72,411
                                                      -------          -------          -------
          Gross profit                                  7,222            2,827            3,865

Selling and administrative expenses                     4,331            4,085            4,136

Restructuring provision                                     -              850            7,430

Pulp mill asset impairment charge                           -              783                -
                                                      -------          -------          -------
                                                        4,331            5,718           11,566
                                                      -------          -------          -------
          Operating income (loss)                       2,891           (2,891)          (7,701)

Other income (expense):

  Interest and dividend income                            237              236              224

  Interest expense                                     (1,196)          (1,354)            (894)

  Executive termination costs                            (286)               -                -

  Unrealized holding gain on 
    trading securities                                      -                -              307

 Gain (loss) on disposal of property,
    plant, equipment and  timberlands                     632             (14)            4,871

  Miscellaneous, net                                      363              428            (253)
                                                      -------          -------          -------
                                                         (250)            (704)            4,255
                                                      -------          -------          -------
Income (loss) before income taxes                       2,641           (3,595)          (3,446)

Provision (benefit)  for income taxes                     897           (1,153)          (1,234)
                                                      -------          -------          -------
          Net income (loss)                            $1,744          $(2,442)         $(2,212)
                                                      =======          =======          =======
          Net earnings (loss) per share                 $0.89           $(1.25)          $(1.14)
                                                      =======          =======          =======

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

</TABLE>

                                       17
<PAGE>

                    Badger Paper Mills, Inc. and Subsidiaries

                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                For Years ended December 31, 1998, 1997 and 1996
                             (dollars in thousands)

                                             1998        1997        1996

Common stock
  Balance, December 31                     $  2,700    $  2,700    $  2,700
                                            -------     -------     -------
Additional paid-in capital
  Balance, January 1                            190         178         168
  Treasury stock issued                          10          12          10
                                            -------     -------     -------
  Balance, December 31                          200         190         178
                                            -------     -------     -------
Retained earnings
  Balance, January 1                         15,552      17,994      20,633
  Net income (loss)                           1,744      (2,442)     (2,212)
  Cash dividend of $.22 in 1996                --          --          (427)
                                            -------     -------     -------
  Balance, December 31                       17,296      15,552      17,994
                                            -------     -------     -------
Treasury stock
  Balance, January 1                         (1,998)     (2,040)     (2,058)
  Shares acquired (920 shares in 1997)         --            (8)       --

  Shares issued (8,867, 7,645 and 2,800
    shares in 1998, 1997 and 1996,
    respectively)                                59          50          18
                                            -------     -------     -------
  Balance, December 31                       (1,939)     (1,998)     (2,040)
                                            -------     -------     -------
Shareholders' equity
  Balance, December 31                     $ 18,257    $ 16,444    $ 18,832
                                            =======     =======     =======


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


                                       18
<PAGE>


<TABLE>
                                  Badger Paper Mills, Inc. and Subsidiaries

                                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                              For Years ended December 31, 1998, 1997 and 1996
                                            (dollars in thousands)
<CAPTION>
                                                                                  1998            1997           1996

<S>                                                                                 <C>          <C>           <C>     
Cash flows from operating activities:
  Net income (loss)                                                                 1,744         $(2,442)      $(2,212)
  Adjustments to reconcile to net cash provided by operating activities:
      Depreciation and depletion                                                    2,752           2,790         2,743
      Pulp mill closure provision, net of cash expenditures                             -               -         6,923
      Pulp mill impairment charge                                                       -             783             -
      Director's fees paid in stock                                                    69              60             -
      Deferred income taxes                                                           586            (746)         (905)
      Net proceeds from sales of marketable securities trading                          -               -         2,533
      Unrealized holding loss on marketable securities trading                          -               -          (307)
      Realized loss (gain) on sale of marketable securities                            48              (8)          468
      (Gain) loss on disposal of property, plant, equipment and
        timberlands                                                                  (632)             14        (4,871)

  Changes in assets and liabilities
      Accounts receivable, net                                                       (142)           (564)        2,399
      Inventories                                                                  (1,357)          1,993          (113)
      Accounts payable and accrued liabilities                                     (1,351)         (2,250)          719
      Income taxes refundable (payable)                                               528           1,081        (1,293)
      Other                                                                          (166)           (312)         (753)
                                                                                  -------         -------      --------
          Net cash provided by operating activities                                 2,079             399         5,331

Cash flows from investing activities:
  Additions to property, plant, equipment and timberlands                          (3,004)         (4,686)       (6,856)
  Proceeds from sale of property, plant, equipment and timberlands                  2,880             627         5,133
  Net acquisition of certificates of deposit                                          386          (1,382)            -
  Purchases of marketable securities                                               (1,927)         (1,192)       (3,601)
  Proceeds from sale of marketable securities                                       1,836           1,682         2,245
  Restricted funds from Industrial Development Revenue Bond                             -               -            34
                                                                                  -------         -------      --------
          Net cash provided by (used in) investing activities                         171          (4,951)       (3,045)

Cash flows from financing activities:
  Payments on long-term debt                                                       (2,323)           (119)         (115)
  Increase in revolving notes payable                                               1,000           1,900         1,500
  Dividends paid                                                                        -               -          (427)
  Acquisition of treasury stock - net                                                   -              (6)            -
                                                                                  -------         -------      --------
          Net cash used in (provided by) financing activities                      (1,323)          1,775           958
                                                                                  -------         -------      --------

NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS                                                                         927          (2,777)        3,244

Cash and cash equivalents:
  Beginning of year                                                                 1,302           4,079           835
                                                                                  -------         -------      --------
  End of year                                                                      $2,229          $1,302        $4,079
                                                                                  =======         =======      ========

The accompanying notes are an integral part of these statements.

</TABLE>

                                       19
<PAGE>

                    Badger Paper Mills, Inc. and Subsidiaries
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           December 31, 1998 and 1997

NOTE A - SUMMARY OF ACCOUNTING POLICIES

Badger Paper Mills,  Inc. and Subsidiaries  ("Company")  manufactures  paper and
paper  products  and  provides  converting  and  printing  services to customers
throughout North America. In February 1998, Peshtigo Power, LLC ("Peshtigo") was
incorporated  to produce steam for Badger Paper Mills,  Inc.  Peshtigo  Power is
wholly owned by the Company.

A summary of the significant  accounting  policies applied in the preparation of
the accompanying consolidated financial statements follows.

1.  Consolidation Principles

The  consolidated  financial  statements  include the  accounts of Badger  Paper
Mills,  Inc. and its  wholly-owned  Subsidiaries.  All significant  intercompany
accounts and transactions have been eliminated.


2.  Operating Segments

The Company has adopted the  provisions  of Statement  of  Financial  Accounting
Standards  (SFAS) No. 131,  "Disclosures  About  Segments of an  Enterprise  and
Related  Information".  SFAS 131 requires public  companies to use a "management
approach" to defining and reporting the  activities of operating  segments.  The
management   approach  defines  operating  segments  along  the  lines  used  by
management to assess performance and make operating and capital  decisions.  The
adoption  of SFAS 131 did not affect the  Company's  results  of  operations  or
financial position, but did affect the disclosure of segment information.
See Note H.

3.  Concentration of Credit Risk

Financial instruments which potentially subject the Company to concentrations of
credit risk consist  principally of cash and cash equivalents and trade accounts
receivable.  The Company places its cash and cash  equivalents with high quality
financial  institutions.  The Company  provides  credit in the normal  course of
business to its customers. These customers are located throughout North America.
The Company performs  ongoing credit  evaluations of its customers and maintains
allowances for potential credit losses and generally does not require collateral
to support the accounts receivable balances.

4.  Estimates

Preparation  of  the  consolidated   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 liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.

The valuation of trade  credits  involves a  significant  estimate.  The Company
regularly  evaluates the  recoverability  of its trade credits.  The Company has
looked at several  factors in  determining  the  recoverability.  These  factors
included:   1)  prior   experience  in  utilizing  trade  credits;   2)  current
negotiations  with vendors which would involve the utilization of trade credits;
3) existing contractual agreements with vendors which utilize trade credits; and
4) the likelihood of renewing and extending  existing  agreements  which utilize
trade  credits.  It is reasonably  possible  that the Company's  estimate of the
recoverability of these trade credits will change significantly, with the result
that the carrying value may have to be reduced.



                                    20
<PAGE>

5.  Cash Equivalents and Certificates of Deposit

For financial reporting  purposes,  the Company considers all highly liquid debt
instruments  purchased  with a  maturity  of  three  months  or  less to be cash
equivalents.

6.  Marketable Securities

The  investment  portfolio  at  December  31, 1998 and 1997,  which  consists of
taxable United States agency bonds, corporate bonds, tax-exempt bonds and equity
securities are classified as available for sale. The difference between cost and
fair  value is  insignificant.  The  specific  identification  method is used to
compute realized gains and losses. The bonds mature at various dates as follows:
1 year to 5 years,  $58,843,  and after 10 years,  $1,142,531.  The  balance  of
marketable securities consists of equity securities of $160,000.

7.  Receivables

Accounts receivable are stated net of an allowance for sales returns,  discounts
and doubtful accounts.

8.  Trade Credits

Trade  credits  represent  credits  issued by an  international  barter  firm in
exchange for surplus inventory.  Trade credits are recorded at the lower of cost
or market of the inventory exchanged. Gain is recognized upon utilization of the
trade credits with the Company's suppliers and vendors.

9.  Inventories

Substantially  all  inventories  are valued at the lower of cost or market  with
cost being determined on the last-in, first-out (LIFO) basis.

10.  Property, Plant, Equipment and Timberlands

These assets are stated at cost, less  depreciation and depletion.  Depreciation
of plant and equipment is provided on the straight-line basis over the estimated
useful  lives of the  assets.  Accelerated  depreciation  is used for income tax
purposes. Depletion on timberlands is determined on the cost method.

11.  Income Taxes

Deferred income taxes are recognized for the tax consequences in future years of
differences  between the tax bases of assets and liabilities and their financial
reporting  amounts at each year-end  based on enacted tax laws and statutory tax
rates  applicable to the periods in which the differences are expected to affect
taxable income.  Valuation  allowances are established  when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the tax payable for the period and the change  during the period in deferred tax
assets and liabilities.

12.  Research and Product Development Costs

Research and product  development  costs  related to potential  new products and
applications  are  expensed  when  incurred.  These  costs  totaled  $2,971,000,
$5,287,000 and $862,000 for 1998, 1997 and 1996, respectively,  and are included
in cost of sales.


                                       21
<PAGE>


13.  Net Earnings Per Share

Net  earnings per share are computed  based on the  weighted  average  number of
shares of common stock outstanding during the year (1,955,772 shares,  1,947,128
shares  and  1,944,699  shares  in  1998,  1997  and  1996,  respectively).  The
contingently  issued stock options  discussed in Note M have not been considered
in this calculation.

14.   Revenue Recognition

Revenue is recognized by the Company when goods are shipped.

15.  Environmental Expenditures

Accruals for remediation costs are recorded when it is probable that a liability
has been incurred and the amount of the costs can be reasonable estimated.

16.  Financial Instruments

For cash and  certificates  of deposit,  the carrying amount  approximates  fair
value because of the short maturity of these  instruments.  For long-term  debt,
the carrying  amount  approximates  fair value based on comparison  with current
rates offered to the Company for debt with similar remaining maturities.

17.  Reclassifications

Certain  reclassifications  have  been  made to the 1997  and 1996  consolidated
financial statements to conform to the 1998 presentation.


NOTE B - RECEIVABLE ALLOWANCES

    The  receivable  allowances at December 31, 1998 and 1997 are as follows (in
thousands):

                                                 1998          1997 
                                                ------        ------
        Sales returns and allowances             $154          $208
        Cash discounts                             31            35
        Doubtful accounts                          59            75
                                                -----         -----
                                                 $244          $318
                                                =====         =====

NOTE C - INVENTORIES

The major classes of  inventories,  valued on the LIFO cost method,  at December
31, 1998 and 1997 are as follows (in thousands):

                                                      1998          1997   
                                                      ----          ----   
                                                           

        Raw materials                                $1,858         $1,281
        Work-in-process and finished stock            4,343          3,563
                                                      -----          -----
                                                     $6,201         $4,844
                                                      =====          =====

                                       22
<PAGE>

The FIFO cost of raw materials,  work-in-process  and finished stock inventories
approximated   $10,150,000  and  $9,050,000  at  December  31,  1998  and  1997,
respectively. It is not practical to separate finished stock and work-in-process
inventories.


NOTE D - PROPERTY, PLANT, EQUIPMENT AND TIMBERLANDS

The major classes of property,  plant, equipment and timberlands at December 31,
are as follows (in thousands):

                                                         1998         1997
                                                                  

       Land                                           $     120    $     120
       Buildings                                          8,297        8,268
       Machinery, equipment and 
        railroad siding                                  56,044       56,105
       Timberlands                                           79           79
       Construction-in-progress - 
        equipment                                           549        1,757
                                                         ------       ------
                                                         65,089       66,329

       Accumulated depreciation and depletion            37,798       37,042
                                                         ------       ------
                                                        $27,291      $29,287
                                                         ======       ======


At December 31, 1998 and 1997,  $18,184,000 and  $17,650,000,  respectively,  of
fully  depreciated  assets  were still in use.  In  December  1997,  the Company
evaluated the remaining  fixed assets held for resale relating to the closure of
the pulp mill by comparing the asset's  carrying amount with its fair value less
cost to sell.  As a  result,  the  Company  recorded  an  impairment  charge  of
$783,000.

During  1998,  the Company  sold its  off-site  training  facility  for $725,000
resulting in a gain of $611,000.

During 1996, the Company sold timberlands for $5,051,000  resulting in a gain of
$4,873,000.


NOTE E - ACCRUED LIABILITIES

Accrued liabilities at December 31, 1998 and 1997 are as follows (in thousands):

                                                     1998                 1997
    
         Compensation and related taxes              $1,539             $1,975
         Profit sharing                                 496                587
         Restructuring                                   15                810
         Environmental remediation                      121                200
         Other                                        1,186                736
                                                     ------              -----
                                                     $3,357             $4,308
                                                      =====              =====


                                       23
<PAGE>


NOTE F - LONG-TERM DEBT

Long-term  debt at December  31, 1998 and 1997  consisted of the  following  (in
thousands):

                                                           1998           1997
                                                           ----           ----
     Revolving Credit Agreement                          $10,200         $11,400
     Industrial Development Revenue Bonds (IDRBs)          7,417           7,483
     Urban Development Action Grant                        1,577           1,634
                                                          ------          ------
                                                          19,194          20,517
     Less:  current portion                                3,068             123
                                                          ------          ------
                                                         $16,126         $20,394
                                                          ======         =======


In January 1999,  the Company  refinanced  its revolving  credit  facility.  The
Company's refinanced revolving credit facility provides for borrowings up to $12
million and extends to November,  2001. A  commitment  fee of 1/2  percent is
payable for unused amounts. Interest on borrowings is at the LIBOR rate plus 2.0
percent   (totaling   7.54  percent  at  December  31,  1998).   Borrowings  are
collateralized by cash and cash equivalents, certificates of deposit, marketable
securities,  accounts  receivable,  inventory  and certain  property,  plant and
equipment.


Certain of the IDRBs require  varying  quarterly  installments  of $140,000 plus
interest  beginning  March 31,  1999  through  March 31,  2006.  The  Company is
required to make a principal  payment of not less than $1,885,000 in March 1999.
Principal installments of $495,000,  $400,000 and $35,000 are due June 30, 1999,
2000 and  2001,  respectively,  and  $65,000  is due  January  31,  2001.  These
installments  are in addition  to the  quarterly  installments.  Interest on the
IDRBs is payable at floating rates determined by remarketing agents (4.1 percent
at December 31, 1998).  The remaining  IDRBs are due in monthly  installments of
$5,555 plus interest through maturity in 1999.

The revolving credit facility and certain IDRBs require,  among other items, the
Company to maintain a fixed charge  coverage  ratio of 1.15 and 1.50 for periods
ending June 29, 2000 and 2001,  respectively  and 2.0 for periods  subsequent to
June 29, 2001; a debt leverage ratio of 3.50 for 1999 and 2.75 for periods after
1999. Capital  expenditures are limited to not more than $3,700,000,  $6,000,000
and $4,800,000 in 1999, 2000 and 2001, respectively.

The Urban  Development  Action Grant is due in monthly  installments of $15,437,
including  interest at an effective rate of approximately  8.0 percent,  through
maturity in April,  2000,  at which time a final  payment of  $1,499,490 is due.
This grant is collateralized by certain machinery and equipment.

Future maturities of all long-term debt are as follows:

             Year ended December 31,

                        1999                                 $  3,068
                        2000                                    2,476
                        2001                                   10,860
                        2002                                      560
                        2003                                      560
                        2004 and thereafter                     1,670
                                                               ------
                                                              $19,194
                                                               ======


                                       24
<PAGE>


NOTE G - INCOME TAXES

The  provision  (benefit)  for  income  taxes  consists  of  the  following  (in
thousands):

                                            1998        1997           1996
                                            ----        ----           ----

   Currently payable (refundable):
      Federal                               $179      $  (438)       $  (359)
      State                                  132           31             30
                                            ----         ----           ----
                                             311         (407)          (329)

   Deferred:
      Federal                                336         (746)          (915)
      State                                  250           -              10
                                            ----         ----           ----
                                             586         (746)          (905)
                                            ----         ----           ----
                                            $897      $(1,153)       $(1,234)
                                            ====       ======         ======


The  significant  differences  between the  effective tax rate and the statutory
federal tax rates are as follows:

                                            1998       1997          1996


      Statutory Federal tax rate            34.0%     (34.0)%       (34.0)%
      Tax-exempt interest                      -          -          (0.4)
      State taxes                              -          -           0.8
      Other                                    -        1.9          (2.2) 
                                            ----      -----         -----
              Effective tax rate            34.0%     (32.1)%       (35.8)%
                                            ====      =====         =====


The components of the deferred tax assets and  liabilities as of December 31 are
as follows (in thousands):

                                                         1998        1997
                                                                  

       Deferred tax assets:
         Accounts receivable                         $    143       $    108
         Inventories                                      311            436
         Accrued expenses                                 766            763
         Deferred compensation                             95            118
         Postretirement benefits                          290            344
         Tax credit carryforwards                       2,938          2,710
         State net operating loss carryforwards           362            550
         State credit carryforwards                     2,099          1,766
         Valuation allowance                           (2,692)        (2,075)
                                                      -------        -------
                                                        4,312          4,720
       Deferred tax liabilities:
         Fixed assets                                  (4,792)        (4,614)
                                                      -------        -------
               Net asset (liability)                 $   (480)      $    106
                                                      =======        =======

                                       25
<PAGE>

For Federal income tax purposes, the Company has research and development credit
carryovers  and  alternative  minimum tax credit  carryovers of  $1,099,000  and
$1,840,000,  respectively.  For state income tax  purposes,  the Company has net
operating  loss  and  tax  credit  carryovers  of  $11,796,000  and  $2,098,000,
respectively.  Certain carryforwards expire at various times over the next 10-15
year period. For financial  reporting  purposes,  a valuation allowance has been
established  to the  extent  that state  carryforwards,  absent  future  taxable
income,  will expire unused. The valuation allowance increased $617,000 based on
management's reevaluation of the likelihood of realization.

NOTE H - OPERATING SEGMENTS

The Company adopted SFAS 131 in 1998. Prior years' information has been restated
to present segment  information for the Company's two business  segments,  paper
products  and printing  and  converting  services.  The paper  products  segment
produces a variety of paper  products  including  fine  paper,  business  paper,
colored paper,  waxed paper,  specialty  coated base papers and twisting papers.
The printing and  converting  segment  prints and  converts  flexible  packaging
materials  for  the  paper  products  segment  as well as  films  and  non-woven
materials from other customers.

The accounting  policies of the segments are the same as those described in Note
A, Summary of Significant  Accounting Policies.  Intersegment revenue relates to
the transfer of material or provision of services between the two segments.  The
Company  evaluates the  performance  of its segments and allocates  resources to
them  based on net  earnings.  There are no  jointly  used or  allocated  assets
between the segments.

Total segment  income,  assets and other  significant  items are the same as the
consolidated information.

All  operations of the Company are located in the United  States.  Revenues from
foreign  countries are primarily  from Canada and Mexico,  and are immaterial to
total revenues.



                                       26
<PAGE>

The following provides information on the Company's segments (in thousands):

<TABLE>
<CAPTION>
                                  Paper Products               Printing and Converting                   Total
                              1998       1997       1996       1998       1997       1996       1998       1997       1996

<S>                       <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>      
Revenues from external                                                                                            
customers                 $  61,236  $  66,260  $  72,244  $   6,709  $   5,177  $   5,280  $  67,945  $  71,437  $  77,524

Intersegment revenues           588         38         31      1,630        972      1,217      2,218      1,010      1,248

Depreciation and                                                                                                  
depletion                     2,560      2,617      2,581        192        173        162      2,752      2,790      2,743

Restructuring provision           -        850      7,430          -          -          -          -        850      7,430

Pulp mill asset                                                                                                   
impairment charge                 -        783          -          -          -          -          -        783          -

Interest expense              1,097      1,250        795         99        104         99      1,196      1,354        894

Executive termination                                                                                             
costs                           286          -          -          -          -          -        286          -          -

Gain (loss) from 
disposal of long-lived 
assets                          632        (14)     4,871          -          -          -        632        (14)     4,871

Income tax (benefit)                                                                                              
provision                       862     (1,325)    (1,492)        35        172        258        897     (1,153)    (1,234)

Segment income (loss)         1,490     (2,771)    (2,968)       254        329        756      1,744     (2,442)    (2,212)

Segment assets               42,779     43,184     47,574      5,220      5,172      4,378     47,999     48,356     51,952

Expenditures for                                                                                                  
long-lived assets             2,498      3,502      6,158        506      1,184        698      3,004      4,686      6,856
</TABLE>


The  following  is a  reconciliation  of  segment  information  to  consolidated
information:

Revenues:                                       1998        1997        1996

     Total revenues for segments                $67,945     $71,437     $77,524

     Elimination of intersegment revenues        (2,218)     (1,010)     (1,248)
                                                -------     -------     -------

                                                $65,727     $70,427     $76,276
                                                =======     =======     =======


NOTE I - EMPLOYEE BENEFITS

The Company has profit  sharing  plans  covering  substantially  all  employees.
Contribution  expenses  associated with these plans were $496,000,  $587,000 and
$723,000 in 1998, 1997 and 1996, respectively.


                                       27
<PAGE>


NOTE J - SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest and income taxes was as follows (in thousands):


                                  1998             1997             1996
                                                            

         Interest                $1,235            $1,345          $876
         Income taxes                57                 5           937


Noncash investing and financing activity:

At December 31, 1998, 1997 and 1996, accounts payable included $22,000, $134,000
and $732,000, respectively, for property and equipment additions.

NOTE K - MAJOR CUSTOMERS

In 1998 and 1997, no customers  represented over 10 percent of the Company's net
sales.  Sales to a customer,  which  represents over 10 percent of the Company's
net sales,  were  $12,030,000 in 1996.  These sales were from the Paper Products
operating segment.


NOTE L - DIRECTOR STOCK GRANT PLAN

In  1997,  in  order to  attract  and  retain  competent  directors  to serve as
Directors of the Company,  the Company  established a Director  Stock Grant Plan
(the  "Director  Plan").  An  aggregate  of 25,000  shares  of Common  Stock was
reserved for issuance  under the Director Plan.  Under the Director  Plan,  each
Director of the Company  receives a grant of Common Stock in partial  payment of
his or her  annual  retainer.  During  1998 and 1997,  8,867  and 7,345  shares,
respectively,  were  issued  from  treasury  stock,  at a value of  $69,000  and
$60,000, respectively.


NOTE M B STOCK OPTION PLAN SUBJECT TO SHAREHOLDER APPROVAL

On May 12, 1998, the Board of Directors  approved an incentive stock option plan
(the Plan) as a mechanism to attract and retain its  officers and key  employees
by providing  additional  performance  incentives  and the  opportunity to share
ownership in the Company. The Plan allows the Company to grant options or shares
of  restricted  stock not to exceed  more than an  aggregate  of 130,000  common
shares.  The  exercise  price for any stock  option is equal to the fair  market
value of a share of common  stock on the date of grant.  The term of any  option
may not exceed ten years.  The Plan is  subject  to  approval  by the  Company's
stockholders  at their next annual meeting in May 1999. As of December 31, 1998,
the Board of Directors had conditionally granted 115,000 options to officers and
key  employees at an exercise  price of $8.09 per common  share,  subject to the
approval of the Company's stockholders.

If the Company  stockholders approve this plan, the Company will account for the
stock-based   compensation  using  the  intrinsic  value  method  prescribed  by
Accounting  Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to
Employees."


                                    28
<PAGE>


NOTE N - RESTRUCTURING PROVISIONS

In December 1997, the Company recorded a charge of $850,000 in connection with a
plan  to  discontinue  manufacturing  certain  products  and  eliminate  certain
converting  operations.   The  charge  includes  employee  termination  benefits
($297,000),  write  down  of  equipment  ($313,000),  write  down  of  inventory
($152,000), and a provision for other miscellaneous costs ($88,000).

During 1996,  the Company  recorded a charge of  $7,430,000  resulting  from the
closure of the pulp mill. The charge includes the write down of pulp mill assets
and inventories  ($5,294,000),  costs  associated  with the early  retirement or
severance of certain workers  ($1,672,000) and provision for other miscellaneous
costs ($464,000).


NOTE O - COMMITMENTS AND CONTINGENCIES

Rental Agreements

The Company leases certain  equipment  under various  agreements,  classified as
operating  leases,  expiring  through April 2007. Total rent expense amounted to
approximately  $222,200,  $123,000 and $85,000 for the years ended  December 31,
1998, 1997 and 1996, respectively.

Future minimum rental payments are as follows (in thousands):

      Year ended December 31,

                 1999                                  $   235
                 2000                                      235
                 2001                                      235
                 2002                                      235
                 2003                                      235
                 2004 and thereafter                       786
                                                        ------
                                                        $1,961
                                                        ======

Environmental Matters

The  Company  has accrued for  certain  remediation  costs  associated  with the
closure of a solid waste landfill.  The Company's  estimated  potential exposure
ranges from $121,000 to $471,000,  based on the remediation methods and material
used to close the site. At December 31, 1998, the Company accrued $121,000 based
on its selected  remediation  method and  materials.  Currently,  the  Wisconsin
Department  of Natural  Resources  (WDNR) and the  Company are  negotiating  the
requirements for appropriate site monitoring and further  remediation efforts if
additional  environmental  problems  are  detected at the site.  Also,  WDNR may
require the Company to escrow approximately $250,000 over a five-year period for
additional remediation costs if environmental problems are detected. The Company
does not expect that the  outcome of this  matter  will have a material  adverse
effect on its  consolidated  financial  position or results of operations in any
one year.


PART III


Item  9.  Changes  in and  disagreements  with  accountants  on  accounting  and
financial disclosure


On July 10, 1997,  Badger changed its certifying  accountant.  Badger's Board of
Directors approved the dismissal of the accounting firm Coopers and Lybrand LLP,
and  concurrently  resolved to engage Grant  Thornton LLP in their place.


                                       29
<PAGE>

Grant Thornton,  who currently serves as Badger's principal accountant,  audited
the Company's financial  statements for the fiscal years ended December 31, 1998
and 1997.

The reports  made by Coopers and Lybrand on Badger's  financial  statements  for
1996  contained  no adverse  opinion or  disclaimer  of  opinion,  nor were such
reports  qualified or modified as to  uncertainty,  audit scope,  or  accounting
principles.  During the fiscal year 1996,  and for the interim period ended July
10, 1997,  Badger had no disagreement  with Coopers and Lybrand on any matter of
accounting principles or practices,  financial statement disclosure, or auditing
scope or procedure,  which,  if not resolved to the  satisfaction of Coopers and
Lybrand, would have caused them to make reference to the matter in their report.
No other  reportable  events  occurred  within  Badger's two most recent  fiscal
years.

Item 10.  Directors and executive officers of the registrant

(a)  Directors of the registrant

The  information  required by this item is  incorporated  by reference  from the
information included under the captions, "Election of Directors" and "Compliance
with  Section  16(a) of the  Securities  Exchange  Act of 1934" set forth in the
Company's   definitive   proxy   statement  for  its  1999  Annual   Meeting  of
Shareholders.

(b)  Executive officers of registrant

                                                                   Period Served
   Name              Age            Office                        In This Office

Michael J. Bekes     41  Vice President/COO of the Company              3 years
                         Vice President/COO, Fletcher Paper Co.     1 1/2 years
                         Mill Manager, Fletcher Paper Co.             1/2 year
                         Manager of Operations, Fletcher Paper Co.  5 1/2 years

Thomas W. Cosgrove   58  President of the Company                     3/4 year
                         General Manager, Kimberly Clark 
                         Corporation (Scott Paper Co.), 
                         Marinette Division                             8 years

Thomas J. Kuber      58  Chairman of the Board of the Company          12 years
                         President, K&K Warehousing                    26 years
                         Chief Executive Officer, Great
                         Lakes Pulp & Fibre, Inc.                       4 years

Clifton A. Martin    47  Vice President, General Manager, Badger
                         Paper Flexible Pkg.                        2 3/4 years
                         General Manager, Badger Paper Flexible
                         Packaging                                  3 3/4 years
                         Sales Representative of the Company        6 1/2 years

Mark C. Neumann      39  Vice President/Sales of the Company        3 3/4 years
                         Director of Marketing of the Company       2 3/4 years
                         Sales Representative of the Company        7 1/2 years

George J. Zimmerman  52  Treasurer of the Company                     3/4 year
                         Controller of the Company                      3 years
                         Division Accounting Manager, Pope & Talbot     7 years


Officers  are  elected  to  hold  office  until  the  next  annual   meeting  of
shareholders  following  the  annual  meeting  of  shareholders  or until  their
successors are elected and qualified.  There is no arrangement or  understanding
between  any 

                                       30
<PAGE>

of the above  officers or any other  person  pursuant to which such  officer was
selected for the office held. No family  relationship of any kind exists between
the officers.

Item 11.  Executive compensation

The  information  required by this item is  incorporated  by reference  from the
information  included under the captions  "Executive  Compensation",  "Report of
Compensation   Committee  on  Annual  Executive  Management   Compensation"  and
"Compensation  Committee Interlocks and Insider  Participation" set forth in the
Company's   definitive   proxy   statement  for  its  1999  Annual   Meeting  of
Shareholders.

Item 12.  Security ownership of certain beneficial owners and management

(a)  Security ownership of certain beneficial owners

The  information  required by this item is  incorporated  by reference  from the
information  included under the caption,  "Stock Ownership of Certain Beneficial
Owners and  Management,"  set forth in the Company's  definitive proxy statement
for its 1999 Annual Meeting of Shareholders.

(b)  Security ownership of management

The  information  required by this item is  incorporated  by reference  from the
information included under the captions,  "Stock Ownership of Certain Beneficial
Owners and Management," and "Election of Directors",  set forth in the Company's
definitive proxy statement for its 1999 Annual Meeting of Shareholders.

Item 13.  Certain relationships and related transactions

The  information  required by this item is  incorporated  by reference  from the
information included under the caption, "Certain Transactions," set forth in the
Company's   definitive   proxy   statement  for  its  1999  Annual   Meeting  of
Shareholders.

                                       31
<PAGE>

PART IV

Item 14.  Exhibits, financial statement schedules and reports on Form 8-K

(a)  (1) List of financial statements:

The following is a list of the financial statements of Badger Paper Mills, Inc.,
together with the report of independent accountant, included in this report:

                                                                     Pages
 Reports of Independent Accountant
   Consolidated balance sheets, December 31, 1998 and 1997............16
   Consolidated statements of operations for the years ended
     December 31, 1998, 1997 and 1996.................................17
   Consolidated statements of changes in shareholders'
     equity for the years ended
     December 31, 1998, 1997 and 1996.................................18
   Consolidated statements of cash flows for the years
     ended December 31, 1998, 1997 and 1996...........................19
   Notes to financial statements......................................20

(a)  (2) List of financial schedules:

The following is a listing of data submitted herewith:

   Reports of independent accountant on financial statement
     schedule
   Schedule for the years ended December 31, 1998, 1997 and 1996:
     II  Valuation and qualifying accounts and reserves...............36

Financial  statement  schedules other than that listed above are omitted for the
reason that they are either not  applicable,  not required,  or that  equivalent
information has been included in the financial statements,  the notes thereto or
elsewhere herein.

(a)  (3)  Exhibits

     (3)  (i) Restated  Articles of Incorporation,  as amended  (Incorporated by
              reference to Exhibit 3(i) to the  Company's  Annual Report on Form
              10-K for the year ended December 31, 1996).

         (ii) By-laws as  amended  through  March  13,  1997  (Incorporated   by
              reference  to  Exhibit 3(ii) to  the  Company's  Annual  Report on
              Form 10-K for the year ended December 31, 1996).

     (4)  (i) U. S. $12,000,000 Credit Agreement dated January 29, 1999, by and
              among the Company, Badger Paper Mills Flexible Packaging Division,
              Inc.(formerly known as Plas-Techs, Inc.) and Harris Trust and
              Savings Bank, individually and as agent, and the lenders from time
              to time party thereto.

     (10)     Material Contracts:**

          (i) Supplemental  Executive  Retirement  Plan dated  December 18, 1992
              (Incorporated  by  reference  to Exhibit 10 (ii) to the  Company's
              Annual Report on Form 10-K for the year ended December 31, 1992).

         (ii) Executive  Employment  Agreement dated March 1, 1995,  between the
              Company  and Claude L. Van Hefty  (Incorporated  by  reference  to
              Exhibit  10(vii) to the  Company's  Annual Report on Form 10-K for
              the year ended December 31, 1994).

         (iii)Health  Insurance  Retirement  Benefit  Agreement dated January 1,
              1996 between the Company and Claude L. Van Hefty  (Incorporated by
              reference to Exhibit 10(v) to the Company's  Annual Report on Form
              10-K for the year ended December 31, 1996).

                                       32
<PAGE>

         (iv) Director  Stock  Grant Plan dated July 23, 1997  (Incorporated  by
              reference to Exhibit 10 to the Company's  Quarterly Report on Form
              10-Q for the quarter ended September 30, 1997).

          (v) Employee  Resignation and Release  Agreement dated as of March 12,
              1998  between  Badger  Paper  Mills,  Inc. and Claude L. Van Hefty
              (Incorporated  by reference to Exhibit 10.1 to the Company's
              Quarterly  Report on Form 10-Q for the quarter ended June 30,
              1998).

         (vi) Employee  Resignation and Release  Agreement dated as of March 12,
              1998  between  Badger Paper  Mills,  Inc. and Miles L. Kresl,  Jr.
              (Incorporated  by reference to Exhibit 10.2 to the Company's
              Quarterly  Report on Form 10-Q for the quarter ended June 30,
              1998).

     (23) (i) Consent of Current Independent Public Accountant

         (ii) Consent of Former Independent Public Accountant

     (27)     Financial Data Schedule (EDGAR version only)

     (99)     Definitive Proxy Statement for 1999 Annual Meeting of ShareholderS
              (to be filed with the Commission under Regulation 14A and 
              incorporated by reference herein to the extent indicated in this 
              Form 10-K).

**Each  of  the  "material  contracts"  represents  a  management   compensatory
agreement or arrangement.

(b)  Reports on Form 8-K:

          (i) No reports on Form 8-K were  filed  during the fourth  quarter of
              1998.





                                       33
<PAGE>


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

DATE:  March 31, 1999

                                           BADGER PAPER MILLS, INC.


                                            By:  /s/ Thomas W. Cosgrove
                                                 Thomas W. Cosgrove
                                                 President
                                                 (Chief Operating Officer)


                                             By: /s/ George J. Zimmerman
                                                 George J. Zimmerman
                                                 Treasurer
                                                 (Chief Accounting Officer)

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



/s/ L. Harvey Buek         Director                        March 31, 1999
L. Harvey Buek


/s/ Mark D. Burish         Director                        March 31, 1999
Mark D. Burish


/s/ Thomas W. Cosgrove     Director                        March 31, 1999
Thomas W. Cosgrove


/s/ James L. Kemerling     Director                        March 31, 1999
James L. Kemerling


/s/ Thomas J. Kuber        Director                        March 31, 1999
Thomas J. Kuber


/s/ John R. Peterson       Director                        March 31, 1999
John R. Peterson


                                       34
<PAGE>


                REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT






To the Shareholders and
  Board of Directors
Badger Paper Mills, Inc.
  and Subsidiaries
Peshtigo, Wisconsin


Our report on the 1998 and 1997 financial statements of Badger Paper Mills, Inc.
and  Subsidiaries  is included on page 14 of this Form 10-K. In connection  with
our  audit of such  financial  statements,  we have  also  audited  the  related
financial  statement  schedule listed in the index on page 31 of this Form 10-K.
The 1996  financial  statements  and  schedules of Badger Paper Mills,  Inc. and
Subsidiaries were audited by other auditors.

In our  opinion,  the 1998 and 1997  financial  statement  schedule  referred to
above,  when  considered  in  relation  to  the  basic  consolidated   financial
statements taken as a whole,  presents  fairly,  in all material  respects,  the
information required to be included therein.



/s/ Grant Thornton LLP

Appleton, Wisconsin
January 29, 1999


                                       35
<PAGE>


Schedule II - Valuation and Qualifying Accounts and Reserves for the years ended
December 31, 1998, 1997 and 1996 (in thousands)

<TABLE>
<CAPTION>

                 Column A                      Column B        Column C      Column D         Column E
                                                              Additions
                                              Balance at      charged to                      Balance
                                              beginning       costs and       Deduc-         at end of
                Description                    of year         expenses       tions             year

<S>                                               <C>           <C>          <C>                 <C> 
Deducted in the balance sheet from
  the assets to which they apply:

Allowance for discounts,
  doubtful accounts and claims/
   allowances:

Year ended December 31, 1998:
  Doubtful accounts and
     claims/allowances                            $283            $780        $ 850   (A)        $213
  Discounts                                         35             661          665   (B)          31
                                                  ----          ------       ------              ----
                                                  $318          $1,441       $1,515              $244
                                                  ====          ======       ======              ====
Year ended December 31, 1997:
  Doubtful accounts and
     claims/allowances                            $127            $791         $635   (A)        $283
  Discounts                                         38             814          817   (B)          35
                                                  ----          ------       ------              ----
                                                  $165          $1,605       $1,452              $318
                                                  ====          ======       ======              ====
Year ended December 31, 1996:
  Doubtful accounts and
     claims/allowances                            $136          $1,249       $1,258   (A)        $127
  Discounts                                         54             896          912   (B)          38
                                                  ----          ------       ------              ----
                                                  $190          $2,145       $2,170              $165
                                                  ====         =======      =======              ====

(A)  Write-off of uncollectible accounts and claims for products

(B)  Discounts taken and allowed

Column C(2) has been omitted as the answer would be "None."

</TABLE>

                                      36
<PAGE>


Shareholders' Information

Market makers:                                   Stock transfer agent:
Robert W. Baird & Co., Inc. (BARD)               Harris Trust & Savings Bank
Herzog, Heine, Geduld, Inc. (HRZG)               111 West Monroe Street
                                                 Chicago, Illinois 60690


Stock Price and Dividend Information:

The following  table presents high and low sales prices of the Company's  Common
Stock in the indicated  calendar  quarters,  as reported on the Nasdaq  National
Market System.

Quarterly Price Ranges of Stock:

                                  1998                      1997

       Quarter               High          Low         High          Low
       First                $8.875       $6.750      $10.250       $7.750
       Second              $10.750       $6.875       $9.250       $7.250
       Third                $9.750       $7.250      $11.250       $7.750
       Fourth               $8.500       $6.500      $11.000       $6.630


Quarterly Dividends Per Share:

Dividend  rates are  established  by the Board of  Directors.  During  the first
quarter 1997, the Board suspended payment of quarterly dividends.  The Company's
line of credit maintains  certain covenants which limit the Company's ability to
pay  dividends.  See  "Management's  Discussion  and Analysis --  Liquidity  and
Capital Resources -- Capital Resources."


Annual Meeting of Shareholders:

The Annual Meeting of Shareholders  of Badger Paper Mills,  Inc. will be held at
The Best Western Riverfront Inn, 1821 Riverside Avenue, Marinette, Wisconsin, on
Tuesday, May 11, 1999, at 10:00 a.m.


                                       37
<PAGE>


                             DIRECTORS AND OFFICERS


Board of Directors:

Thomas J. Kuber - Chairman
     President
     K&K Warehousing

L. Harvey Buek
     LHB - O & M Consulting

Mark D. Burish
     President
     Hurley, Burish & Milliken, SC

Thomas W. Cosgrove
     President
     Badger Paper Mills, Inc.

James L. Kemerling
     Consultant

John R. Peterson
     Managing Director
     Cleary Gull Reiland & McDevitt, Inc.


Corporate Officers:

Thomas J. Kuber
     Chairman of the Board

Thomas W. Cosgrove
     President

Michael J. Bekes
     Vice President and COO

Clifton A. Martin
     Vice President
     Badger Paper Flexible Packaging Div.

Mark C. Neumann
     Vice President/Sales

George J. Zimmerman
     Treasurer

Mark D. Burish
     Secretary

Susan A. Rudolph
     Assistant Secretary

                                       38
<PAGE>

                                  EXHIBIT INDEX

                            BADGER PAPER MILLS, INC.
                           ANNUAL REPORT ON FORM 10-K
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

  Exhibit No.     Description

     (3)  (i) Restated  Articles of Incorporation,  as amended  (Incorporated by
              reference to Exhibit 3(i) to the  Company's  Annual Report on Form
              10-K for the year ended December 31, 1996).

         (ii) By-laws as  amended  through  March  13,  1997  (Incorporated   by
              reference  to  Exhibit 3(ii) to  the  Company's  Annual  Report on
              Form 10-K for the year ended December 31, 1996).

     (4)  (i) U. S. $12,000,000 Credit Agreement dated January 29, 1999, by and
              among the Company, Badger Paper Mills Flexible Packaging Division,
              Inc.(formerly known as Plas-Techs, Inc.) and Harris Trust and
              Savings Bank, individually and as agent, and the lenders from time
              to time party thereto.

     (10)     Material Contracts:**

          (i) Supplemental  Executive  Retirement  Plan dated  December 18, 1992
              (Incorporated  by  reference  to Exhibit 10 (ii) to the  Company's
              Annual Report on Form 10-K for the year ended December 31, 1992).

         (ii) Executive  Employment  Agreement dated March 1, 1995,  between the
              Company  and Claude L. Van Hefty  (Incorporated  by  reference  to
              Exhibit  10(vii) to the  Company's  Annual Report on Form 10-K for
              the year ended December 31, 1994).

         (iii)Health  Insurance  Retirement  Benefit  Agreement dated January 1,
              1996 between the Company and Claude L. Van Hefty  (Incorporated by
              reference to Exhibit 10(v) to the Company's  Annual Report on Form
              10-K for the year ended December 31, 1996).

         (iv) Director  Stock  Grant Plan dated July 23, 1997  (Incorporated  by
              reference to Exhibit 10 to the Company's  Quarterly Report on Form
              10-Q for the quarter ended September 30, 1997).

          (v) Employee  Resignation and Release  Agreement dated as of March 12,
              1998  between  Badger  Paper  Mills,  Inc. and Claude L. Van Hefty
              (Incorporated  by reference to Exhibit 10.1 to the Company's
              Quarterly  Report on Form 10-Q for the quarter ended June 30,
              1998).

         (vi) Employee  Resignation and Release  Agreement dated as of March 12,
              1998  between  Badger Paper  Mills,  Inc. and Miles L. Kresl,  Jr.
              (Incorporated  by reference to Exhibit 10.2 to the Company's
              Quarterly  Report on Form 10-Q for the quarter ended June 30,
              1998).

     (23) (i) Consent of Current Independent Public Accountant

         (ii) Consent of Former Independent Public Accountant

     (27)     Financial Data Schedule (EDGAR version only)

     (99)     Definitive Proxy Statement for 1999 Annual Meeting of ShareholderS
              (to be filed with the Commission under Regulation 14A and 
              incorporated by reference herein to the extent indicated in this 
              Form 10-K).

**Each  of  the  "material  contracts"  represents  a  management   compensatory
agreement or arrangement.