IREX CORP, 10-K, 1998-04-01

IREX CORP
10-K, 1998-04-01
CONSTRUCTION - SPECIAL TRADE CONTRACTORS

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SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1997 Commission file number 2-36877

Irex Corporation
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

Pennsylvania 23-1712949
(STATE OR OTHER JURISDICTION OF INC.OR ORG. (I.R.S. EMPLOYER IDENT. NO.)

120 North Lime Street, Lancaster, Pennsylvania 17602
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

Registrant's telephone number, including area code (717) 397-3633

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

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

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

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

As of March 23, 1998, 405,484 common shares were outstanding and the
aggregate market value of the voting stock (based upon the average bid and
asked prices on March 23, 1998) held by nonaffiliates was approximately
$7,720,469.

Documents Incorporated by Reference
NONE<PAGE>
PART I

Item 1. Business

Irex Corporation ("The Company") consists of two business units. The
distribution unit is primarily a distributor and fabricator of
mechanical insulation, architectural/acoustical products, and specialty
products. The companies in the specialty contracting unit primarily
engage in mechanical insulation, abatement, fire protection and interior
finish contracting. Domestic operations are conducted through four
wholly owned subsidiaries: ACandS, Inc.; Specialty Products and
Insulation Co.; CENTIN Corporation; and Spacecon, Inc. Commercial
Interior Builders, Inc. has been inactive since December 31, 1992 and
was merged into ACandS, Inc., with ACandS surviving the merger,
effective as of the close of business on September 30, 1996. Through
ACandS Contracting Ltd., a wholly owned subsidiary of ACandS, Inc., the
Company is engaged in thermal insulation contracting in Canada. In
1997, 54% of total revenues were derived from the distribution unit and
46% were the result of specialty contracting operations. These
percentages are reflective of a trend over the past several years,
wherein distribution has been a growing part of the Company's business.

Substantially all of the Company's insulation contracts are made with
private contractors, subcontractors and other builders, and such
contracts are normally awarded on the basis of competitive bids.
Insulation contracting, as part of the general construction business,
has been and continues to be highly competitive. The Company is one of
the largest in its field, however, and over the years has maintained
good customer relationships, with a significant percentage of its sales
attributable to contracts with customers for whom the Company has
previously done work.

As of December 31, 1997, the Company had an unbilled contract backlog of
$40.5 million as compared to an unbilled contract backlog of $47.6
million on December 31, 1996. A substantial portion of this backlog can
reasonably be expected to be installed during 1998, since the average
life cycle of the Company's projects is less than a year. During the
past five years, beginning backlog ranged from 30% to 40% of contract
revenues during the ensuing year.

The Company purchases its materials from a number of sources and is not
dependent upon any one supplier for any substantial portion of its
requirements. Insulation materials are in plentiful supply and no
critical shortages are expected.

The Company owns or holds no significant patents, licenses, franchises
or other concessions. No significant expenditures are made for new
product development, since most materials are purchased directly from
manufacturers for installation by the Company on projects where the
owner or his representatives specify the products to be applied.

Federal, state and local regulations enacted to protect the environment
have not had any material effect upon capital expenditures, earnings or
competitive position.

Item 2. Properties

The Company owns five properties in Lancaster, Pennsylvania. One is
used as the Company's general offices, a two-story brick building
containing 21,000 square feet of space. A second is primarily used for
general office parking. The third consists mainly of a 29,000 square
foot warehouse and shop facility which is used by the Company's
subsidiary, Specialty Products and Insulation Co. The fourth, a one-story
brick building containing 3,500 square feet of space, is used primarily as
headquarters of Specialty Products and Insulation Co. The fifth, a two and
one-half story brick building containing 2,500 square feet of space, is
predominantly rented to a third party.

All of the remaining offices, warehouses and fabricating shops of the
Company are leased at various locations throughout the United States and
Canada. Some regional and area offices share facilities at the same
location, and most of the distribution offices are divided into both
warehouse and office space. A few have fabricating shops connected with
the warehouse. There are 89 leased regional, area and branch offices in
the United States and two offices in Canada.

The Company also owns construction tools, light trucks, fabricating
machinery, and such related equipment as required by its undertakings,
all of which are considered to be in good working order and none of
which is subject to any major encumbrances. Most of the automotive
fleet has been converted to an operating lease arrangement with lease
terms of up to five years.

Item 3. Legal Proceedings

The Company's ACandS, Inc. subsidiary is one of a number of defendants
in pending lawsuits filed by approximately 103,000 individual claimants
seeking damages for injuries allegedly caused by exposure to asbestos
fibers in insulation products used at one time by ACandS in its
business. ACandS has defenses to these actions, including defenses
based on the fact it is primarily a contracting company in the business
of installing products manufactured by others. During 1997, ACandS was
served with cases involving 31,489 individual plaintiffs. In 1996,
ACandS was served with cases involving approximately 37,777 individual
plaintiffs. There were 44,904 new plaintiffs in 1995; 18,122 new
plaintiffs in 1994; and 20,542 new plaintiffs in 1993.

The great majority of the filings in 1995, 1996 and 1997 appear to be
the direct result of screenings and other mass solicitation efforts. Of
the claims filed during the period, approximately two thirds were filed
in either Texas, West Virginia or by the Maritime Legal Clinic. Most of
the Maritime Legal Clinic filings have been administratively dismissed,
West Virginia filings were reduced substantially during the second half
of 1996 and 1997 and on May 29, 1997 Texas enacted tort reform
legislation designed to limit the filings in Texas by non-Texas
plaintiffs.

It is the pattern in this litigation for suits to be filed as the result
of mass screenings of individuals employed at a particular facility,
through a particular union local, or by a particular employer. It is
ACandS's experience that such suits are often filed with little
investigation as to whether the claimant ever had any causative exposure
to asbestos-containing products associated with the various named
defendants. Because of this pattern, historically, about half of the
cases filed against ACandS have been closed without payment. As the
scope of the mass screening programs has increased, the degree of
illness of the claimants has appeared to diminish.

The defense of the cases pending against ACandS is now being handled by
the Travelers Property Casualty Corp. with the participation of other
insurers that wrote coverage for ACandS. Virtually all of ACandS's
liability and defense costs for these cases are being paid by ACandS's
insurance carriers.

Since the beginning of 1981, approximately 155,000 individual claims
against ACandS have been settled, dismissed or otherwise resolved.
Although payments in individual cases have varied considerably, ACandS's
percentage of the aggregate liability payments for those cases has been
small. As a result, ACandS's average resolution cost for closed cases
is very low. The resolution cost per closed case in recent years has
been consistent with longterm averages. Bankruptcy filings by a number
of companies which had been significant defendants in asbestos cases
have not significantly increased the cost of resolving cases.

On July 29, 1991, the Judicial Panel on Multidistrict Litigation ordered
that all asbestos-related bodily injury cases pending in the Federal
trial courts and not then in trial should be transferred to Judge
Charles R. Weiner in the United States District Court for the Eastern
District of Pennsylvania for coordinated or consolidated pretrial
proceedings. These proceedings involved less than one-fourth of the
cases then pending against ACandS.

Subsequently, on January 15, 1993, certain plaintiffs' counsel and a
group of 20 asbestos litigation defendants filed a class action
complaint and settlement agreement involving all previously unasserted
claims by individuals who have been occupationally exposed to asbestos
fibers, which was assigned to Judge Weiner as related to the
Multidistrict Litigation proceedings. On June 25, 1997, the U.S.
Supreme Court affirmed dismissal of the class action and settlement,
finding that the case did not meet the requirements of the rules
permitting class actions.

Although the large number of pending cases, the continued efforts of
certain courts to clear dockets through consolidated proceedings, the
bankruptcy filings by defendants, efforts toward national solutions, and
the transfer of federal cases to the United States District Court for
the Eastern District of Pennsylvania render prediction uncertain,
ACandS expects that its percentage of liability payments will continue
to be relatively small.

ACandS has secured the commitment through final settlement agreements of
most of the very substantial insurance coverage applicable to its
asbestos-related bodily injury claims. ACandS believes it will secure
additional coverage, if needed, from those insurers which have not to
date settled with ACandS. Two insurers which wrote significant
applicable coverage for ACandS have encountered financial difficulties
in recent years, in part because of asbestos and environmental
liabilities, but ACandS does not believe these difficulties will affect
the adequacy of the coverage available to it.

Given the number of currently pending cases and the rate of new filings,
it is anticipated that the aggregate amount to be paid by all defendants
for asbestos-related bodily injury claims will be very large.
Nevertheless, as noted, ACandS's percentage of aggregate liability
payments is expected to remain small. Management, therefore, believes
that ACandS's insurance coverage is adequate to ensure that these
actions will not have a material adverse effect on the long-term
business or financial position of the Company.

ACandS is also one of a number of defendants in six actions by the owners of
schools and other buildings seeking to recover costs associated with the
replacement or treatment of installed asbestos-containing products. These
cases involve school buildings, public buildings, and office buildings. One
of the cases is an alleged class action.

ACandS has substantial defenses to the actions, including defenses based
upon the character of its operations and the fact that ACandS did not
manufacture the asbestos-containing products involved. Moreover, ACandS
potentially has indemnification and/or contribution claims against the
product manufacturers. To date, ACandS has been dismissed from 102
cases, largely on the basis it had no connection with the products at
issue in the claimants' buildings, and has agreed to settle 15 claims.
The aggregate amount paid has been very small in the context of this
litigation. ACandS was not served with any new building-related cases
in 1995, 1996 or 1997. Since 1990, only three new building-related
cases have been served on ACandS.

The Travelers Property Casualty Corp. is currently providing ACandS with
a defense in these building cases, as well as paying settlements when
necessary. Coverage based on policies of the Travelers Insurance
Companies is furnished pursuant to a settlement agreement, but coverage
based on policies of Aetna Casualty and Surety Co. (now part of
Travelers) is subject to asserted reservations of rights to later
contest both the availability and the amount of coverage. Required
payments, nevertheless, continue to be made on the Aetna policies.

Decisions in litigation involving insurance coverage available for other
defendants in asbestos building cases have thus far varied widely. The
appellate rulings which have fully considered coverage issues for
asbestos building claims to date provide significant coverage for
policyholders. The decisions are consistent with ACandS's view that the
trend in the courts is to provide broad coverage for asbestos building
cases.

Although the availability of coverage for existing and future suits is
not resolved, and the aggregate potential loss from these suits may be
significant, management believes that ACandS's defenses, potential
indemnification and/or contribution rights and insurance coverage are
adequate to ensure that these actions will not have a material adverse
effect on the long-term business or financial position of the Company.

On August 27, 1997, the U.S. Occupational, Safety and Health
Administration issued a Citation and Notification of Penalty to Centin
Corporation proposing a fine of $307,350 for alleged regulatory
violations involving asbestos abatement work at Wright Patterson Air
Force Base. The Assistant U.S. Attorney for Dayton, Ohio has also
advised Centin of an intention to pursue sanctions in connection with
alleged violations of environmental law on this project. Centin had
previously disciplined employees for breach of company policy involving
this work. Centin believes, however, that the violations as alleged are
either incorrect or substantially overstated. Centin has filed a Notice
of Contest to the OSHA citation.

From time to time, the Company and its subsidiaries are also parties as
both plaintiff and defendant to various claims and litigation arising in
the normal course of business, including claims concerning work
performed under various contracts. In the opinion of management, the
outcome of the alleged Wright Patterson Air Force Base violations, as
well as claims and litigation arising in the normal course of business,
will not materially affect the Company's long-term business, financial
position or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

PART II

Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters

The Company's Common Stock is traded in limited over-the-counter
transactions. The number of shares of Common Stock available for
trading has been small relative to the total number of shares
outstanding, and the trading is sporadic. Price quotations are only
binding for a limited number of shares.

The following table sets forth the high and low bid prices per share and
the dividends per share for the periods indicated. Price quotations
have been obtained from National Quotation Bureau, Inc.

High Bid Low Bid

1996 1st Quarter 21 20
2nd Quarter 20 - 1/8 20
3rd Quarter 20 - 1/4 20
4th Quarter 20 - 3/4 20 - 1/4

1997 1st Quarter 22 - 1/4 20 - 3/4
2nd Quarter 25 - 1/4 22
3rd Quarter 26 - 3/4 25
4th Quarter 27 - 1/2 26 - 3/4

On March 23, 1998, the stock price quotation according to National
Quotation Bureau, Inc. was 31.25 bid and none offered, and there were
316 record holders of the Company's Common Stock. The total number of
shares outstanding is 405,484. The Company has not paid a cash dividend
on its Common Stock during the two-year period ended December 31, 1997.
In the foreseeable future, the Company does not expect to pay cash
dividends on the outstanding common shares at December 31, 1997.

Item 6. Selected Financial Data

IREX CORPORATION AND SUBSIDIARIES:
Following is a consolidated summary of operations for the five years
ended December 31, 1997. This summary should be read in conjunction
with the consolidated financial statements and notes thereto, which are
included in Item 8 of this report.

CONSOLIDATED SUMMARY OF OPERATIONS

Year Ended December 31
1997 1996 1995 1994 1993
(Dollars in thousands, except per share data)
TOTAL REVENUES $278,150 $271,131 $244,441 $240,636 $237,369
NET INCOME (LOSS) $ 2,533 $ 2,873 $ 1,778 (1) $ 2,227 $ (389)
PREFERRED STOCK
DIVIDENDS (2) $ (980) $ (980) $ (980) $ (980) $ (980)
INCOME (LOSS)
APPLICABLE TO
COMMON SHARES $ 1,553 $ 1,893 $ 798 $ 1,247 $ (1,369)
CASH FLOW FROM
OPERATIONS $ 3,219 $ 1,933 $ 392 $ 2,770 $ (2,937)
TOTAL ASSETS $ 88,545 $ 85,325 $ 81,635 $ 82,560 $ 81,483
LONG TERM DEBT (3) $ 7,504 $ 9,286 $ 12,543 $ 15,800 $ 17,414
REDEEMABLE
PREFERRED STOCK (2)$ 10,490 $ 10,490 $ 10,496 $ 10,496 $ 10,496
PER COMMON SHARE:
EARNINGS - BASIC (4) $4.05 $4.80 $2.01 $3.11 $(3.36)
EARNINGS - DILUTED (4) $4.00 $4.76 $2.00 $3.11 $(3.36)
CASH DIVIDENDS (2) $ - $ - $ - $ - $ -
BOOK VALUE $34.59 $30.58 $25.59 $23.14 $19.94

(1) Includes cumulative effect of accounting change, net of income
taxes of $1,377,000 due to change in the method of estimating workers'
compensation claims liability. See Note 1 to the accompanying
consolidated financial statements.

(2) See Note 13 to the accompanying consolidated financial statements.

(3) See Note 11 to the accompanying consolidated financial statements.

(4) See Note 9 to the accompanying consolidated financial statements.

Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations

The Company reported net income of $2,533,000 for the year ended
December 31, 1997, an 11.8% decrease from the $2,873,000 reported for
the year ended December 31, 1996. Net income for the year ended
December 31, 1995 was $1,778,000. Included in the results for 1995 is
the cumulative effect of an accounting change, net of income taxes, of
$1,377,000 due to the change in method of estimating the liability for
workers' compensation claims.
Net income applicable to common shareholders after preferred dividends
was $1,553,000 for the year ended December 31, 1997 as compared to
$1,893,000 and $798,000 for the years ended December 31, 1996 and 1995,
respectively. Net income per common share was $4.05 for the year ended
December 31, 1997. While this result was $0.75 per common share below
the $4.80 achieved for the year ended December 31, 1996, it more than
doubled the $2.01 per common share for the year ended December 31, 1995.
The loss per common share before cumulative effect of the accounting
change was $(1.46) and the cumulative effect of the accounting change
was $3.47 per common share for the year ended December 31, 1995.

Return on average common shareholders' equity, calculated on net income
applicable to common stock, was 12.8%, 18.1% and 8.1% for the years
ended December 31, 1997, 1996 and 1995, respectively. The Company's
return on average assets, calculated on net income, was 2.9% for the
year ended December 31, 1997, as compared to 3.4% and 2.2% for years
ended December 31, 1996 and 1995, respectively. The return on average
equity and return on average assets before the cumulative effect of the
accounting change in 1995 were (5.9%) and 0.5%, respectively.

The Company's distribution subsidiary achieved double-digit growth in
revenues and operating income for the fifth consecutive year. Three
acquisitions completed during the last quarter of 1997 (see Note 3 to
the accompanying financial statements) have positioned the distribution
subsidiary to continue its record of positive contributions to the
Company's operating results. On the whole, the Company's contracting
operations have been squeezed by intense regional competition, where
pricing pressures have negatively impacted revenue and earnings
performance. In 1997, the principal contracting subsidiaries moved
forward in the transition begun during the second half of 1996. The
focus has been on creating an operating structure that will provide the
most cost-effective and responsive services to customers. The Company's
smallest subsidiary, whose specialty is interior finish contracting, saw
1997 revenues increase by 35% over the prior year accompanied by strong
earnings performance for the second consecutive year.

On January 19, 1998, the Company announced its intention to spin off its
distribution subsidiary, Specialty Products and Insulation Company
(SPI). Following the transaction, the Company will continue as a parent
company, providing administrative services to its three specialty
contracting companies. SPI will continue as a specialty product
distribution/fabrication company primarily serving the construction
industry. See Note 17 to the accompanying financial statements for more
information on the spin-off transaction.

The following discussion and analysis of results of operations provides
additional information on the Company's businesses and should be read in
conjunction with the consolidated financial statements and accompanying
notes.

Results of Operations

The Company and its subsidiaries operate within the specialty
contracting industry (Contracting) and the distribution of products
related to that industry (Distribution). Total revenues of $278.2
million in 1997 represented a slight increase from the prior year's
total revenue of $271.1 million and were 13.8% ahead of the 1995
revenues of $244.4 million. For the first time in the Company's
history, distribution revenues accounted for more than 50% of total
revenues. Distribution revenues accounted for 53.8%, 48.3% and 45.1% of
total revenues in 1997, 1996 and 1995, respectively. Although still
strong, the rate of growth for distribution revenues slowed to 14.2% in
1997, as compared to 18.9% in 1996. Distribution revenues were $149.7
million, $131.1 million and $110.2 million in 1997, 1996 and 1995,
respectively. Export activity now comprises more than 10% of
distribution revenues. Export sales totaled $16.0 million in 1997
compared to $11.0 million in 1996 and $2.0 million in 1995. Five
distribution facilities opened between May 1996 and January 1997 were
responsible for approximately $7.0 million of the $18.6 million increase
in distribution revenues reported for 1997. Two acquisitions, completed
toward the end of the year as previously noted, added $1.1 million to
1997 revenues.

Contracting revenues declined to their lowest level since 1985.
Contracting revenues of $128.4 million in 1997 were 8.4% below the
$140.1 million reported for 1996 and also fell $5.8 million short of the
$134.2 million recorded in 1995. In addition to the competitive
pressures discussed earlier, deregulation in the power generation
industry has caused a decline in contracting revenues from this
industry. For the three-year period ended December 31, 1997, such
revenues have comprised approximately 25% of total contracting revenues.
The Company has refocused attention on business development and
marketing efforts, recognizing that a broader customer base is needed to
stabilize recent trends in revenue erosion.

Gross profit of $60.4 million in 1997 was virtually unchanged from the
$60.3 million earned during 1996, and it remained a substantial
improvement compared to the $52.8 million gross profit generated in
1995. Distribution gross profit was $32.6 million, representing a 10.9
% increase over the $29.4 million achieved in 1996 and a 29.9% increase
over the $25.1 million reported for 1995. Revenue growth continues to
drive the upward trend in gross profit as distribution margins, gross
profit dollars expressed as a percentage of revenues, have actually
decreased by one percentage point during the three-year period ended
December 31, 1997. Gross profit from contracting slid to $27.7 million
in 1997, returning to the level of two years ago, after rebounding to
$30.8 million in 1996. Since contracting margins in 1997 were down only
slightly compared to 1996, the decrease in gross profit is mostly
attributable to a decrease in revenues during this period Although the
contracting operations reported similar gross profit in both 1997 and
1995, margins were actually a full percentage point better in 1997.

Selling, general and administrative (SG&A) expenses increased by less
than 1% to $53.9 million for the year ended December 31, 1997. SG&A
expenses were $53.5 million and $50.0 million in 1996 and 1995,
respectively. SG&A expenses within the distribution business, before
allocation of parent administrative costs, grew by $1.6 million in 1997
compared to 1996, and this increase is primarily attributable to the
opening of five distribution facilities and two acquisitions noted
earlier.

The distribution business experienced a $2.7 million increase in SG&A
expenses during 1996 as compared to 1995, which reflects the growth
trend and expansion of operations. Full-time salaried employees within
the distribution business increased by 13 and 12, respectively, during
1997 and 1996.

SG&A expenses within the contracting businesses, before allocation of
parent administrative costs, decreased by $1.3 million in 1997 as
compared to the prior year. The restructuring (further described in
Note 15 to the accompanying financial statements) undertaken during 1996
by ACandS, Inc., the Company's principal contracting subsidiary,
resulted in a $2.2 million reduction to SG&A expenses in 1997. This
decrease was offset by a $0.9 million increase in the remaining
contracting businesses. Full-time salaried employees within the
contracting businesses decreased by 29 and 43, respectively, during 1997
and 1996 as these operations have aligned costs with a shrinking revenue
base. The Company's total of salaried employees at December 31, 1997
was 422 as compared to 436 and 465 at December 31, 1996 and 1995,
respectively. Consistent during the three-year period ended December
31, 1997, personnel expenses accounted for approximately 60% of total
SG&A expenses.

Operating income dipped slightly to $6.4 million in 1997 from the $6.8
million earned in 1996 but was still $3.7 million above the $2.7 million
reported for 1995. Operating income expressed as a percentage of
revenues was 2.3%, 2.5% and 1.1% for 1997, 1996 and 1995, respectively.

Finance and Liquidity

The Company's working capital position has remained relatively strong
despite weak earnings performance from the contracting operations and
the requirements for continued expansion of the distribution business.
Working capital was $32.3 million at December 31, 1997 as compared to
$34.1 million at December 31, 1996. The increase in accounts receivable
is mostly attributable to the growth in total revenues of the Company.
Turnover of accounts receivable within the distribution operations
improved to 5.7 in 1997, up from 5.5 a year ago. However, turnover of
accounts receivable in the contracting businesses fell from 4.7 to 4.3
during the same period. The $2.0 million increase in inventories in
1997 compared to 1996 is primarily the result of acquisitions and new
distribution facilities as turnover of inventories was relatively
unchanged during the period. Contract backlog was $40.5 million at
December 31, 1997. This level is significantly below the $47.6 million
and $51.9 million at December 31, 1996 and 1995, respectively,

Capital expenditures of $1.2 million in 1997 were comparable to the $1.2
million in 1996 and $1.0 million in 1995. Management does not foresee
any significant capital expenditures in the near term other than the
normal replacement of equipment.

Total debt outstanding at December 31, 1997 was $27.6 million compared
to $24.7 million at December 31, 1996. Available short-term lines of
credit as of December 31, 1997 were $26.3 million, of which $18.2
million was in use. Short-term debt was used to provide funding of $3.5
million for the acquisitions made during 1997. Credit lines available
continue to provide adequate flexibility for operations. See Note 11 to
the accompanying financial statements for more information on the
Company's borrowings.

Preferred Stock Issuance and Dividends

During 1992, the Company exchanged 349,864 shares of redeemable
preferred stock for an equal number of the Company's outstanding common
shares. No shares were redeemed during 1997, and 349,673 preferred
shares remain outstanding at December 31, 1997. The common shares
exchanged were included in Treasury Stock at December 31, 1997. See
Note 13 to the accompanying financial statements for more information on
the Company's redeemable preferred stock.
Dividends on the preferred stock accrue at an annual rate of $2.80 per
share. In the foreseeable future, the Company does not expect to pay
cash dividends on the outstanding common shares at December 31, 1997.

Income Taxes

The effective tax rate was 43.7% in 1997 compared to 41.6% in 1996 and
51.8% in 1995. The Company's effective tax rate is primarily dependent
upon the amount of operating income and its effect on the rate
attributable to the 50% disallowance for meals and entertainment, the
impact of state rates on deferred tax assets and the sources of state
taxable income.

Net deferred income tax assets were $7.6 million at December 31, 1997
compared to $8.2 million at December 31, 1996. The Company has
determined that no valuation allowance for the deferred income tax asset
is required as of December 31, 1997 and 1996, as the future realization
of such tax benefits is considered to be more likely than not through
the combination of carryback availability, certain tax-planning
strategies that would allow for acceleration of deductible temporary
differences to utilize remaining carryback availability and through
expected future taxable income. Future taxable income must be
approximately $11.8 million in order to realize the portion of deferred
tax assets not realizable through carryback availability or tax-planning
strategies.

Year 2000 Issue

The Company's ability to conduct its day-to-day operations is dependent
in part on an integrated software program and data-based system
(collectively, the System). The System serves as a critical tool in
carrying out functions in several key areas of the business, including
inventory management, contract management, pricing, sales, financial
reporting and personnel administration.

The Company has assessed the System and determined that modifications
are required to properly utilize dates beyond December 31, 1999. The
Company had already committed to upgrade the System in order to renew
the vendor maintenance agreement (under which the Company receives
technical support), and believes the upgrade will substantially resolve
Year 2000 issues in the System. The Company will utilize both internal
and external resources to replace, reprogram and test software for Year
2000 compliance and plans to complete the conversion prior to December
31, 1998. These costs arising through the normal course of business
will be expensed as incurred. In relation to hardware within the System
(primarily desktop computers networked to a central location),
management does not have an estimate of the cost to replace these items.

The Company does not currently have any information concerning Year 2000
compliance status of its suppliers and customers. In the event that any
of the Company's significant suppliers or customers does not
successfully and timely achieve Year 2000 compliance, the Company's
business or operations could be adversely affected.

Item 8. Financial Statements and Supplementary Data

1. Irex Corporation and Subsidiaries:
(a) Report of Independent Public Accountants

(b) Consolidated Balance Sheets -- December 31, 1997 and 1996

(d) Consolidated Statements of Shareholders' Investment for the
Three Years Ended December 31, 1997, 1996 and 1995

(e) Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 1997, 1996 and 1995

(f) Notes to Consolidated Financial Statements -- December 31,
1997, 1996 and 1995

(g) Schedules:

II - Valuation and Qualifying Accounts for the Three Years
Ended December 31, 1997, 1996 and 1995

All other schedules are omitted as not applicable because the required
matter or conditions are not present.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and Board of
Directors, Irex Corporation:

We have audited the accompanying consolidated balance sheets of Irex
Corporation (a Pennsylvania corporation) and subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements of income,
shareholders' investment and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements and the
schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Irex
Corporation and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.

As explained in Note 1 to the financial statements, effective January 1,
1995, the Company changed its method of accounting for the estimated
liability for workers' compensation claims.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index
of financial statements is for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subject to the auditing procedures
applies in the audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.

Lancaster, Pennsylvania
February 24, 1998

IREX CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31

ASSETS 1997 1996

CURRENT ASSETS:
Cash and cash equivalents (Note 6) $ 374,000 $ 193,000
Receivables, less reserves of $ 809,000 in
1997 and $1,590,000 in 1996 54,835,000 53,520,000
Inventories of materials and supplies, at
the lower of cost (first-in, first-out)
or market 16,138,000 14,125,000
Actual costs and estimated earnings
on contracts in process in excess of
billings (Notes 1 and 2) 4,421,000 5,130,000
Prepaid income taxes (Note 4) 225,000 ---
Other prepaid expenses 733,000 962,000
Deferred income taxes (Notes 1 and 4) 4,391,000 4,759,000

Total current assets 81,117,000 78,689,000

PROPERTY AND EQUIPMENT,
at cost (Note 1):
Land 158,000 158,000
Buildings and improvements 3,487,000 3,155,000
Machinery and equipment 7,294,000 6,933,000
10,939,000 10,246,000
Less - Accumulated depreciation (7,699,000) (7,164,000)

3,240,000 3,082,000
NON-CURRENT DEFERRED INCOME
TAXES (Notes 1 and 4) 3,170,000 3,425,000

OTHER ASSETS (Note 1) 1,018,000 129,000

$ 88,545,000 $ 85,325,000

LIABILITIES AND
SHAREHOLDERS' INVESTMENT

CURRENT LIABILITIES:
Notes payable to banks (Note 11) $ 18,224,000 $ 12,169,000
Current portion of long-term debt (Note 11) 1,876,000 3,257,000
Accounts payable 10,502,000 10,372,000
Billings in excess of actual costs and
estimated earnings on contracts in process
(Notes 1 and 2) 2,797,000 2,786,000
Accrued workers' compensation insurance
(Note 1) 2,604,000 3,601,000
Accrued liabilities (Note 14) 12,831,000 12,253,000
Accrued income taxes (Note 4) --- 198,000
Total current liabilities 48,834,000 44,636,000

LONG-TERM DEBT, less current portion (Note 11) 7,504,000 9,286,000

NON-CURRENT LIABILITIES (Notes 1 and 16) 8,644,000 9,127,000

REDEEMABLE PREFERRED STOCK, $1 par
value; authorized 2,000,000 shares; issued
and outstanding 349,673 shares in 1997 and
1996 (Note 13) 10,490,000 10,490,000

SHAREHOLDERS' INVESTMENT:
Common stock $1 par value;
authorized 2,000,000 shares; issued
1,028,633 shares; outstanding 377,934
shares in 1997 and 385,458 shares in 1996 1,028,000 1,028,000
Paid-in surplus 449,000 459,000
Retained earnings 30,663,000 29,110,000
Cumulative translation adjustments (Note 1) (213,000) (165,000)
31,927,000 30,432,000

Treasury stock, 650,699 shares in 1997 and
643,175 shares in 1996, at cost (18,854,000) (18,646,000)

Total shareholders' investment 13,073,000 11,786,000

$ 88,545,000 $ 85,325,000

The accompanying notes are an integral part of these statements.

IREX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

Year Ended December 31
1997 1996 1995

REVENUES (Note 1):
Contracting $128,401,000 $140,063,000 $134,215,000
Distribution and other 149,749,000 131,068,000 110,226,000

Total revenues 278,150,000 271,131,000 244,441,000

COST OF REVENUES (Note 1) 217,786,000 210,851,000 191,683,000

Gross profit 60,364,000 60,280,000 52,758,000

SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 53,924,000 53,451,000 50,022,000

Operating income 6,440,000 6,829,000 2,736,000

INTEREST AND DIVIDEND INCOME 18,000 101,000 91,000

INTEREST EXPENSE (1,960,000) (2,007,000) (1,995,000)

Income before income taxes 4,498,000 4,923,000 832,000

INCOME TAX PROVISION
(Notes 1 and 4) 1,965,000 2,050,000 431,000

INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 2,533,000 2,873,000 401,000

CUMULATIVE EFFECT OF
ACCOUNTING CHANGE,
net of income taxes of
$899,000 (Notes 1 and 9) --- --- 1,377,000

NET INCOME $ 2,533,000 $ 2,873,000 $ 1,778,000

Dividend requirements for
Preferred Stock (Note 13) (980,000) (980,000) (980,000)

NET INCOME APPLICABLE
TO COMMON STOCK $ 1,553,000 $ 1,893,000 $ 798,000

Income per common share-Basic $ 4.05 $ 4.80 $ 2.01

Income per common share-Diluted $ 4.00 $ 4.76 $ 2.00

The accompanying notes are an integral part of these statements.

<TABLE>
IREX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
<CAPTION>
Cumulative ESOP Shares
Common Paid-in Retained Translation Treasury Financed
Stock Surplus Earnings Adjustments Stock With Debt

<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 $1,028,000 $ 472,000 $26,419,000 $ (190,000) $(18,347,000) $ (161,000)

Net income --- --- 1,778,000 --- --- ---
Cash dividends on
preferred stock --- --- (980,000) --- --- ---
Debt repayments by
Employee Stock
Ownership Plan --- --- --- --- --- 161,000
Translation
adjustments --- --- --- 32,000 --- ---
Exercise of
stock options --- (7,000) --- --- 15,000 ---
Repurchase of
common stock --- --- --- --- (142,000) ---

BALANCE, DECEMBER 31, 1995 1,028,000 465,000 27,217,000 (158,000) (18,474,000) ---

Net income --- --- 2,873,000 --- --- ---
Cash dividends on
preferred stock --- --- (980,000) --- --- ---
Translation
adjustments --- --- --- (7,000) --- ---
Exercise of
stock options --- (6,000) --- --- 15,000 ---
Repurchase of
common stock --- --- --- --- (187,000) ---

BALANCE, DECEMBER 31, 1996 1,028,000 459,000 29,110,000 (165,000) (18,646,000) ---

Net income --- --- 2,533,000 --- --- ---
Cash dividends on
preferred stock --- --- (980,000) --- --- ---
Translation
adjustments --- --- --- (48,000) --- ---
Issuance of
common stock --- (10,000) --- --- 57,000 ---
Repurchase of
common stock --- --- --- --- (265,000) ---

BALANCE, DECEMBER 31, 1997 $1,028,000 $449,000 $30,663,000 $ (213,000) $(18,854,000) $ ---
</TABLE>

The accompanying notes are an integral part of these statements.

<PAGE>
IREX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31

1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,533,000 $2,873,000 $1,778,000
Reconciliation of net
income to net cash
provided by
operating activities-
Cumulative effect of
accounting change --- --- (1,377,000)
Depreciation and amortization 1,236,000 1,195,000 1,494,000
Deferred income tax
provision (benefit) 623,000 114,000 (301,000)
Provision for losses on
accounts receivable 83,000 1,164,000 1,096,000
Loss (gain) on sale of assets 18,000 (26,000) ---
(Increase) decrease in assets-
Receivables (133,000) (3,045,000) (977,000)
Inventories (667,000) (1,684,000) (634,000)
Actual costs and estimated
earnings on contracts in process
in excess of billings, net 720,000 (215,000) 53,000
Prepaid income taxes (181,000) 303,000 (303,000)
Other prepaid expenses 242,000 (338,000) 403,000
(Decrease) increase in liabilities-
Accounts payable (172,000) 2,453,000 (104,000)
Accrued income taxes (198,000) 198,000 (128,000)
Accrued liabilities and other
liabilities (885,000) (1,059,000) (608,000)
Net cash provided by
operating activities 3,219,000 1,933,000 392,000

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment(1,179,000) (1,201,000) (980,000)
Proceeds from sales of property
and equipment 90,000 226,000 99,000
Acquisitions of certain businesses,
net of cash acquired
Assets, net of liabilities
assumed (2,523,000) (120,000) (961,000)
Intangibles (930,000) (60,000) ---
(Increase) decrease in other assets (96,000) 12,000 81,000
Net cash used for
investing activities (4,638,000) (1,143,000) (1,761,000)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from revolving
lines of credit 6,055,000 3,413,000 2,749,000
Proceeds from long-term debt --- --- 2,800,000
Payments on long-term debt (3,257,000) (3,257,000) (4,219,000)
Dividends paid (980,000) (980,000) (980,000)
Reissuance of common stock 47,000 9,000 8,000
Repurchase of common stock (265,000) (187,000) (142,000)
Repurchase of preferred stock --- (6,000) ---
Net cash provided by
(used for) financing
activities 1,600,000 (1,008,000) 216,000

NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 181,000 (218,000) (1,153,000)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 193,000 411,000 1,564,000
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 374,000 $ 193,000 $ 411,000

The accompanying notes are an integral part of these statements.

IREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995

1. PRINCIPLES OF CONSOLIDATION AND ACCOUNTING POLICIES:

The following summarizes the significant accounting policies employed by
Irex Corporation (the Company) and subsidiaries.

Principles of Consolidation

The consolidated financial statements include the accounts of Irex
Corporation and its subsidiaries, all of which are wholly owned. All
significant intercompany accounts and transactions have been eliminated
in consolidation. Certain 1996 items have been reclassified to conform
with 1997 presentation.

In accordance with Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation," gains and losses resulting from foreign
currency transactions during the year are included in operating results,
while gains and losses resulting from translation of the financial
statements of the Company's Canadian subsidiary at the end of the year
are reflected as cumulative translation adjustments in shareholders'
investment. Foreign currency transaction gains and losses in 1997, 1996
and 1995 were not material.

Estimates and Assumptions

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.

Methods of Accounting for Revenues

Revenues from lump-sum basis construction contracts are recognized on the
percentage of completion method, measured by the percentage of costs
incurred to date to estimated total costs for each contract. This method
is used because management considers this to be the best available
measure of progress on these contracts. Revenues from time and material
contracts are recognized on the basis of costs incurred during the period
plus the fee earned.

Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs and depreciation costs. Selling, general and
administrative costs are charged to expense as incurred. Provisions for
estimated losses on uncompleted contracts are made in the period in which
such losses are determined. Changes in job performance, job conditions
and estimated profitability, including those arising from contract
penalty provisions and contract settlements, result in revisions to costs
and income and are recognized in the period in which the revisions are
determined.

Distribution and other revenues consist primarily of outright sales of
purchased insulation and acoustical products.

Reserves for Certain Self-Insured Business Risks

The Company is self-insured against a portion of its workers'
compensation and other insurance risks. The process of determining
reserve requirements for losses within its self-insured retention limits
utilizes historical trends, involves an evaluation of claim frequency,
severity and other factors and also includes the effect of future
inflation.

Effective January 1, 1995, the Company changed its method of measuring
the estimated liability for workers' compensation claims. The new method
employs actuarial assumptions to discount to present value the estimated
future payments for these claims, using a risk-free interest rate. The
Company believes this method is preferable because it more accurately
reflects the current impact on its financial condition of the future cash
outflows. The cumulative effect of this accounting change was $1,377,000
($2,276,000 less the related tax effect of $899,000) and was included in
net income for the year ended December 31, 1995. The impact of this
change, exclusive of the cumulative effect, on operating results during
1997, 1996 and 1995 was not significant nor is it expected to have a
significant impact on future results of operations.

At December 31, 1997 and 1996, the estimated undiscounted liability for
workers' compensation claims was $9,346,000 and $11,943,000,
respectively. The present value of such claims was $7,695,000 and
$9,487,000, using a weighted average discount rate of 6.66% and 6.80%,
respectively.

The expected future payments as of December 31, 1997, on an undiscounted
basis, are as follows:

1998 $2,632,000
1999 1,639,000
2000 1,082,000
2001 812,000
2002 604,000
2003 and thereafter 2,577,000
$ 9,346,000

Income Taxes

Deferred income taxes are not provided on the undistributed earnings of
the Company's Canadian subsidiary since taxes payable upon distribution,
net of foreign tax credits, are not expected to be significant. At
December 31, 1997, the cumulative amount of such undistributed earnings
was $1,265,000.

Property and Equipment

Property and equipment are depreciated using principally the straight-line
method over the estimated useful lives of the assets. Expenditures for
maintenance and repairs are expensed as incurred.

Classification Estimated Useful Lives

Buildings 15 to 30 years
Leasehold improvements 3 to 10 years
Machinery and equipment 3 to 7 years

Other Assets

Other assets primarily consist of goodwill. Goodwill, which represents
the excess of cost over fair value of the net assets of acquired
businesses, is being amortized on a straight-line basis principally over
15 years. The Company develops operating income projections and
evaluates the recoverability and amortization period of goodwill using
these projections. Based upon management's current assessment, the
estimated remaining amortization period of goodwill is appropriate and
the remaining balance is fully recoverable. Goodwill amortization did
not have a material effect on the operating results for the year ended
December 31, 1997.

Non-Current Liabilities

Other long-term liabilities consist of the non-current portions of
workers' compensation, insurance, pension and postretirement benefit
liabilities.

Concentration of Business

The Company and its subsidiaries operate within the specialty contracting
industry and the distribution of products related to that industry.

For the years ended December 31, 1997, 1996 and 1995, no one customer
accounted for more than 10% of revenues. The Company's contracting and
distribution businesses purchase materials for use in contracts or resale
from a limited number of major suppliers. Such concentration is normal
for the industry and does not present an unreasonable risk or
vulnerability to the Company. Based on completed contracts,
approximately 25% of contracting revenues were derived from the power
generation industry during the three-year period ended December 31, 1997.
Management believes this concentration does not represent an unusual risk
as contracts are widely dispersed by geography and customer.
CONTRACTS IN PROCESS:

Contracts in process as of December 31, 1997 and 1996 are comprised of
the following elements:

1997 1996
Costs and estimated earnings
on uncompleted contracts $ 87,161,000 $ 94,950,000

Less: Billings on uncompleted contracts (85,537,000) (92,606,000)

Net $ 1,624,000 $ 2,344,000

Contracts in process as of December 31, 1997 and 1996 are reflected in
the accompanying balance sheets under the following captions:

1997 1996
Actual costs and estimated
earnings on contracts in
process in excess of billings $ 4,421,000 $ 5,130,000

Billings in excess of actual
costs and estimated earnings
on contracts in process (2,797,000) (2,786,000)

$ 1,624,000 $ 2,344,000

Actual costs incurred on contracts in process in excess of billings
includes contract costs attributable to claims in the amount of $75,000
at December 31, 1997 and 1996. Contract costs related to claims are
carried at the lower of actual costs incurred or estimated net realizable
value.

3. ACQUISITIONS:

The Company completed three acquisitions during 1997 for cash
consideration of approximately $3,453,000. The acquisitions included the
stock of one company and certain assets of two additional companies, all
of which are primarily engaged in the distribution business. The
acquisitions were accounted for using the purchase method of accounting,
and the financial statements reflect the results of operations and cash
flows of the operations from the dates of acquisitions. Had the
acquisitions occurred at the beginning of the periods presented, revenues
and operating income would not have been materially different from
reported results.

During 1995, the Company acquired certain assets of four warehouses for
cash consideration of approximately $961,000. The assets were acquired
from a company primarily engaged in the distribution business.

4. INCOME TAXES:

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(SFAS 109). Deferred income taxes are computed based on the differences
between financial reporting and income tax reporting bases of assets and
liabilities using enacted tax rates. The impact of changes in tax rates
is reflected in income in the period in which the change is enacted. In
conformity with SFAS 109, deferred tax assets are classified based on the
financial reporting classification of the related liabilities and assets
which give rise to temporary book/tax differences. Deferred taxes relate
to the following temporary differences:
1997 1996

Insurance reserves $ 6,470,000 $ 6,698,000
Bad debt reserves 305,000 617,000
Uniform cost capitalization on inventories 477,000 473,000
Pension and other benefits 352,000 436,000
Contracts 97,000 261,000
Other (140,000) (301,000)
$ 7,561,000 $ 8,184,000

The Company has determined that no valuation allowance for the deferred
tax asset is required as of December 31, 1997 and 1996, as the future
realization of such tax benefits is considered to be more likely than not
through the combination of carryback availability, certain tax planning
strategies that would allow for acceleration of deductible temporary
differences to utilize remaining carryback availability and through
expected future taxable income.

Income (loss) before income taxes is comprised of the following
components:

1997 1996 1995

Domestic $ 4,390,000 $ 4,809,000 $ 3,505,000
Foreign 108,000 114,000
(397,000)
$ 4,498,000 $ 4,923,000 $ 3,108,000

Income tax provision (benefit) consists of:

1997 1996 1995
Currently payable:
Federal $ 1,028,000 $ 1,749,000 $ 601,000
State 260,000 130,000 329,000
Foreign 54,000 57,000 (198,000)

Total currently payable 1,342,000 1,936,000 732,000

Deferred:
Federal 602,000 (67,000) (80,000)
State 21,000 181,000 (221,000)

Total deferred 623,000 114,000 (301,000)

Total $ 1,965,000 $ 2,050,000 $ 431,000
(1)

(1) Excludes provision of $899,000 as of January 1, 1995, from the
cumulative effect of the change in accounting (see Note 1).

The effective income tax rate is different from the statutory Federal
income tax rate as indicated below:

1997 1996 1995

Statutory federal income tax rate 34.0% 34.0% 34.0%
State income taxes ($281,000,
$311,000, and $108,000), net
of federal benefit 4.1 4.2 8.6
Meals and entertainment (50% disallowance) 4.5 3.1 17.7
Effects of foreign taxes 0.4 0.4 (7.6)
Other, net 0.7 (0.1) (0.9)

Effective income tax rate 43.7% 41.6% 51.8%

The changes in the effective state income tax rate are due to the impact
of state rate changes on deferred tax assets, as well as the changes in
the sources of the Company's state taxable income.

5. CLAIMS AND CONTINGENCIES:

The Company's ACandS, Inc. subsidiary is one of a number of defendants in
pending lawsuits filed by approximately 103,000 individual claimants
seeking damages for injuries allegedly caused by exposure to asbestos
fibers in insulation products used at one time by ACandS in its business.
ACandS has defenses to these actions, including defenses based on the
fact it is primarily a contracting company in the business of installing
products manufactured by others. During 1997, ACandS was served with
cases involving 31,489 individual plaintiffs. In 1996, ACandS was served
with cases involving approximately 37,777 individual plaintiffs. There
were 44,904 new plaintiffs in 1995; 18,122 new plaintiffs in 1994; and
20,542 new plaintiffs in 1993.

The great majority of the filings in 1995, 1996 and 1997 appear to be the
direct result of screenings and other mass solicitation efforts. Of the
claims filed during the period, approximately two thirds were filed in
either Texas, West Virginia or by the Maritime Legal Clinic. Most of the
Maritime Legal Clinic filings have been administratively dismissed, West
Virginia filings were reduced substantially during the second half of
1996 and 1997 and on May 29, 1997 Texas enacted tort reform legislation
designed to limit the filings in Texas by non-Texas plaintiffs.

It is the pattern in this litigation for suits to be filed as the result
of mass screenings of individuals employed at a particular facility,
through a particular union local, or by a particular employer. It is
ACandS's experience that such suits are often filed with little
investigation as to whether the claimant ever had any causative exposure
to asbestos-containing products associated with the various named
defendants. Because of this pattern, historically, about half of the
cases filed against ACandS have been closed without payment. As the
scope of the mass screening programs has increased, the degree of illness
of the claimants has appeared to diminish.

Since the beginning of 1981, approximately 155,000 individual claims
against ACandS have been settled, dismissed or otherwise resolved.
Although payments in individual cases have varied considerably, ACandS's
percentage of the aggregate liability payments for those cases has been
small. As a result, ACandS's average resolution cost for closed cases is
very low. The resolution cost per closed case in recent years has been
consistent with long-term averages. Bankruptcy filings by a number of
companies which had been significant defendants in asbestos cases have
not significantly increased the cost of resolving cases.

On July 29, 1991, the Judicial Panel on Multidistrict Litigation ordered
that all asbestos-related bodily injury cases pending in the Federal
trial courts and not then in trial should be transferred to Judge Charles
R. Weiner in the United States District Court for the Eastern District of
Pennsylvania for coordinated or consolidated pretrial proceedings. These
proceedings involved less than one-fourth of the cases then pending
against ACandS.

Subsequently, on January 15, 1993, certain plaintiffs' counsel and a
group of 20 asbestos litigation defendants filed a class action complaint
and settlement agreement involving all previously unasserted claims by
individuals who have been occupationally exposed to asbestos fibers,
which was assigned to Judge Weiner as related to the Multidistrict
Litigation proceedings. On June 25, 1997, the U.S. Supreme Court
affirmed dismissal of the class action and settlement, finding that the
case did not meet the requirements of the rules permitting class actions.

Although the large number of pending cases, the continued efforts of
certain courts to clear dockets through consolidated proceedings, the
bankruptcy filings by defendants, efforts toward national solutions, and
the transfer of federal cases to the United States District Court for the
Eastern District of Pennsylvania render prediction uncertain, ACandS
expects that its percentage of liability payments will continue to be
relatively small.

ACandS has secured the commitment through final settlement agreements of
most of the very substantial insurance coverage applicable to its
asbestos-related bodily injury claims. ACandS believes it will secure
additional coverage, if needed, from those insurers which have not to
date settled with ACandS. Two insurers which wrote significant
applicable coverage for ACandS have encountered financial difficulties in
recent years, in part because of asbestos and environmental liabilities,
but ACandS does not believe these difficulties will affect the adequacy
of the coverage available to it.

Given the number of currently pending cases and the rate of new filings,
it is anticipated that the aggregate amount to be paid by all defendants
for asbestos-related bodily injury claims will be very large.
Nevertheless, as noted, ACandS's percentage of aggregate liability
payments is expected to remain small. Management, therefore, believes
that ACandS's insurance coverage is adequate to ensure that these actions
will not have a material adverse effect on the long-term business or
financial position of the Company.

ACandS is also one of a number of defendants in six actions by the owners
of schools and other buildings seeking to recover costs associated with
the replacement or treatment of installed asbestos-containing products.
These cases involve school buildings, public buildings, and office
buildings. One of the cases is an alleged class action.

ACandS has substantial defenses to the actions, including defenses based
upon the character of its operations and the fact that ACandS did not
manufacture the asbestos-containing products involved. Moreover, ACandS
potentially has indemnification and/or contribution claims against the
product manufacturers. To date, ACandS has been dismissed from 102
cases, largely on the basis it had no connection with the products at
issue in the claimants' buildings, and has agreed to settle 15 claims.
The aggregate amount paid has been very small in the context of this
litigation. ACandS was not served with any new building-related cases in
1995, 1996 or 1997. Since 1990, only three new building-related cases
have been served on ACandS.

The Travelers Property Casualty Corp. is currently providing ACandS with
a defense in these building cases, as well as paying settlements when
necessary. Coverage based on policies of the Travelers Insurance
Companies is furnished pursuant to a settlement agreement, but coverage
based on policies of Aetna Casualty and Surety Co. (now part of
Travelers) is subject to asserted reservations of rights to later contest
both the availability and the amount of coverage. Required payments,
nevertheless, continue to be made on the Aetna policies.

From time to time, the Company and its subsidiaries are also parties as
both plaintiff and defendant to various claims and litigation arising in
the normal course of business, including claims concerning work performed
under various contracts. In the opinion of management, the outcome of
the alleged Wright Patterson Air Force Base violations, as well as claims
and litigation arising in the normal course of business, will not
materially affect the Company's long-term business, financial position or
results of operations.

6. CONSOLIDATED STATEMENTS OF CASH FLOWS:

The Company considers all highly liquid investments with a maturity of
three months or less at the time of purchase to be cash equivalents. The
effect of changes in foreign exchange rates on cash balances in 1997,
1996 and 1995 was not material.

The Company's income tax and interest payments are summarized below:

1997 1996 1995

Income taxes (net of refunds) $ 1,708,000 $ 1,548,000 $ 1,010,000

Interest $ 2,005,000 $ 2,054,000 $ 2,034,000

7. EMPLOYEE BENEFIT PLANS:

Defined Benefit Pension Plan

The Company and its subsidiaries have a defined benefit pension plan
covering substantially all of their salaried employees. The benefits
under the plan are based on years of service and salary levels. The
Company's policy is to fund pension costs in accordance with the
requirements of the Employee Retirement Income Security Act of 1974.

Actuarially computed net pension expense includes the following
components:

1997 1996 1995
Service cost-benefits earned
during the period $ 517,000 $ 608,000 $ 480,000

Interest cost on projected
benefit obligation 551,000 524,000 439,000

Return on plan assets:
Actual (1,569,000) (1,042,000) (1,147,000)
Deferred 938,000 510,000 805,000

Recognized return (631,000) (532,000) (342,000)

Net amortization (41,000) 10,000 (5,000)

Net pension expense $ 396,000 $ 610,000 $ 572,000

The following table sets forth the plan's funded status and amounts
recognized in the consolidated balance sheets at December 31, 1997 and
1996:

1997 1996
Actuarial present value of benefit
obligations:
Accumulated benefit obligation,
including vested benefits of
$6,629,000 and $5,568,000,
respectively $ 6,986,000 $ 6,039,000

Projected benefit obligation for service
rendered to date $ 8,760,000 $ 7,698,000
Plan assets at fair value (8,759,000) (7,528,000)
Projected benefit obligation in excess of
plan assets 1,000 170,000
Unrecognized net gain from past experience
different from that assumed and effects
of changes in assumptions 840,000 275,000

Accrued pension cost $ 841,000 $ 445,000

Assumptions used in the accounting were:
1997 1996

Weighted average discount rates 7.25% 7.75%
Rates of increase in future
compensation levels 5.00% 5.00%
Expected long-term rate of return on assets 8.50% 8.50%

A substantial number of the hourly employees of the Company's
subsidiaries are covered by union-sponsored, collectively bargained,
multiemployer pension plans. The Company contributed approximately
$5,297,000 in 1997, $6,146,000 in 1996, and $5,791,000 in 1995 to such
plans. Information is not available from the plans' administrators to
permit the Company to determine its share of the unfunded vested benefits
of these plans.

Postretirement Benefits Other Than Pensions

In addition to providing pension benefits, the Company and its
subsidiaries provide certain health care benefits under company-sponsored
plans for the majority of retired salaried employees. Active salaried
employees who were at least age 55 and had 10 years of consecutive
service at January 1, 1990 are eligible for these benefits upon
retirement. Also, active salaried employees of the Company whose age
plus years of service equaled at least 55 at January 1, 1990 are eligible
for these benefits upon retirement when they attain age 62 as long as
such employees have either 20 years of service or their age plus years of
service equals 90 upon retirement. Cash payments of up to $60.00 per
month are given to retirees over age 65 to purchase supplemental Medicare
coverage. Eligible retirees under age 65 are fully covered by the
Company's insurance plan. The number of retirees under age 65 currently
participating in the plan is not significant.

The expected cost of these benefits is charged to expense during the
years that the employees render service. The transition obligation is
being amortized over 20 years.

Actuarially computed net periodic postretirement benefit cost included
the following components:

1997 1996

Service cost-benefits earned during the period $ 6,000 $ 8,000
Interest cost on accumulated postretirement
benefit obligation 68,000 71,000
Expected return on plan assets --- (9,000)
Amortization of transition obligation 48,000 48,000
Amortization of net gain (30,000) (28,000)

Net periodic postretirement benefit cost $ 92,000 $ 90,000

The following table sets forth the plan's funded status and amounts
recognized in the consolidated balance sheet at December 31, 1997 and
1996:

1997 1996
Accumulated postretirement benefit obligation:
Vested benefit obligation $ 798,000 $ 798,000
Non-vested benefit obligation 129,000 158,000
927,000 956,000
Plan assets at fair value --- (51,000)

Accumulated postretirement benefit obligation
in excess of plan assets 927,000 905,000
Unrecognized transition obligation (721,000) (769,000)
Unrecognized net gain 289,000 340,000

Accrued postretirement benefit liability $ 495,000 $ 476,000

For measurement purposes, a 13% annual rate of increase in the per capita
cost of covered health care benefits was assumed for calendar 1997; the
rate was assumed to decrease to 10% in 1998 and 7% for 2001 and remain
level thereafter. Due to the provisions of the plan, increasing the
assumed health care cost trend rates by one percentage point in each year
would not have a significant impact on the accumulated postretirement
benefit obligation or the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for 1997.

The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% and 7.75% at December 31,
1997 and 1996, respectively. The expected long-term rate of return on
assets was 8.50% for 1996.

Other

The Company and its subsidiaries have incentive compensation plans
covering substantially all of their officers and key employees.
Incentive compensation for 1997 was determined according to a separate
measurement basis for the Company and each of its subsidiaries. Rate of
return on assets, earnings before interest and taxes, and after-tax
earnings in excess of the cost of capital each served as the basis in one
of the various incentive plans. For 1996 and 1995, the amount of
incentive compensation was primarily dependent upon the rate of return on
assets of the Company's subsidiaries and their particular district or
branch offices and the net income of the Company. Total incentive
compensation expense was $2,337,000 for 1997, $2,621,000 for 1996, and
$1,698,000 for 1995.

The Company and its subsidiaries also maintain defined contribution
savings incentive and employee stock ownership (ESOP) plans covering
substantially all salaried employees. Contributions to the savings
incentive plan are based on specified percentages of employee
contributions to the plan, while ESOP contributions are discretionary.
Expense for these plans was $616,000 in 1997, $830,000 in 1996, and
$665,000 in 1995.

8. STOCK OPTION PLANS:

The Company maintains two non-qualified stock option plans providing for
the issuance to key employees and outside directors of up to 80,000
options to purchase shares of the Company's common stock. Generally,
options outstanding under the Company's stock options plans: (i) are
granted at prices which equate to the fair market value of the stock on
the date of grant, (ii) vest over periods of one to three years, and
(iii) expire ten years subsequent to date of grant.

Following is a summary of the status of the number of stock options as of
December 31, 1997, 1996, and 1995, and the activity during the year ended
on those dates, along with the range of exercise prices for options
outstanding at year end:
1997 1996 1995
Wgtd. Wgtd. Wgtd.
Avg. Avg. Avg.
1997 Exer. 1996 Exer. 1995 Exer.
Shares Price Shares Price Shares Price
Options Outstanding at
Beginning of Year 49,350 $23.83 51,350 $24.27 58,475 $25.09

Options Granted 8,600 21.88 9,550 22.13 3,500 16.25

Options Exercised - - (500) 16.25 (500) 16.13

Options Expired
or Canceled (6,100) 24.02 (11,050) 24.77 (10,125) 26.59

Options Outstanding at
End of Year 51,850 $23.48 49,350 $23.83 51,350 $24.27

Range of Exercise Prices
of Options Outstanding $16.125- $16.125- $16.125-
$31.00 $31.00 $31.00

Options Exercisable
End of Year 41,350 28,100 20,850

Options Available for
Future Grant 27,150 29,650 28,150

Weighted Average Fair
Value of Options
Granted During the Year $ 3.79 $ 2.88 $ 1.38

During 1996, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 123, "Accounting for Stock-Based Compensation." As
provided for in the statement, the Company elected to continue the
intrinsic value method of expense recognition.

Had compensation cost for the stock option plans been determined using
the fair value method prescribed by SFAS 123, the Company's net income
applicable to common stock and net income per common share would
approximate the proforma amounts below:

1997 1996 1995
Net Income Applicable to Common Stock
As reported $1,553,000 $1,893,000 $ 798,000
Proforma $1,534,000 $1,877,000 $ 795,000

Net Income Per Common Share
As reported - Basic $ 4.05 $ 4.80 $ 2.01
As reported - Diluted $ 4.00 $ 4.76 $ 2.00
Proforma - Basic $ 4.00 $ 4.76 $ 2.00
Proforma - Diluted $ 3.95 $ 4.72 $ 1.99

The proforma effect of applying SFAS 123 in this disclosure for 1997,
1996 and 1995 is not necessarily representative of the proforma amounts
for future years.

The following tables summarize certain information about stock options
outstanding at December 31, 1997, 1996 and 1995:

-----Options Outstanding-------- -Options Exercisable-
Weighted Weighted Weighted
Avg. Avg. Avg.
Number Remaining Exercise Number Exercise
Outstanding Life Price Exercisable Price
At December 31, 1997
$16 to $23 31,750 7.4 $18.72 21,250 $17.13
$24 to $31 20,100 3.7 $31.00 20,100 $31.00
$16 to $31 51,850 6.0 $23.48 41,350 $23.87

At December 31, 1996
$16 to $23 27,250 8.0 $18.01 6,000 $16.19
$24 to $31 22,100 4.7 $31.00 22,100 31.00
$16 to $31 49,350 6.5 $23.83 28,100 27.84

At December 31, 1995
$16 to $23 23,250 8.5 $16.14 3,000 $16.13
$24 to $31 28,100 5.8 $31.00 17,850 $31.00
$16 to $31 51,350 7.0 $24.27 20,850 $28.86

The fair value of each option granted during 1997, 1996 and 1995 is
estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions: (i) expected volatility of 17.0%
and 23.0% for options granted in 1997 and 10.7% for options granted in
1996 and 1995, (ii) risk-free interest rates of 5.6% and 6.1% for options
granted in 1997; 5.2% and 5.3% for options granted in 1996; 7.3% for
options granted in 1995, (iii) expected lives of one year and three
years, and (iv) no dividend yield.

Subsequent to December 31, 1997, employees and directors of the Company
exercised a total of 27,100 stock options granted in the years 1990
through 1995. On February 26, 1998, the Company's Board of Directors
passed a resolution that all employee stock options granted in 1996 and
1997 and director options granted in 1998 became fully vested
immediately. Subsequent to the Board's action, employees and directors
of the Company exercised an additional 8,500 stock options which had been
granted in 1996, 1997 and 1998. The table below sets forth the year of
grant for those options exercised subsequent to December 31, 1997:

Year Granted Number Exercised
1990 through 1994 25,600
1995 1,500
1996 3,200
1997 4,300
1998 1,000

9. INCOME (LOSS) PER COMMON SHARE:

In 1997, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 128 "Earnings Per Share." SFAS No. 128 requires dual
presentation of basic and diluted earnings per share on the face of the
income statement for all entities with complex capital structures. The
Company's basic income per share is calculated as income available to
common shareholders divided by the weighted average number of shares
outstanding. For diluted income per share, income available to common
shareholders is divided by the weighted average number of shares
outstanding plus the incremental number of shares added as a result of
converting common stock equivalents, as calculated using the treasury
stock method. The Company's common stock equivalents consist solely of
outstanding stock options.

As a result, income per share for 1996 and 1995 were restated as a result
of the Company's adoption of SFAS No. 128. This adoption had no effect
on previously reported income per common share.

Average Per-Share
Income Shares Amount
FOR THE YEAR ENDED 1997

Income per Common Share - Basic
Income available to common
shareholders $ 1,553,000 383,859 $ 4.05
Options issued to Employees
and Directors (Note 8) --- 4,683
Income per Common Share - Diluted
Income available to common
shareholders $ 1,553,000 388,542 $ 4.00

FOR THE YEAR ENDED 1996

Income per Common Share - Basic
Income available to common
shareholders $ 1,893,000 394,653 $ 4.80
Options issued to Employees
and Directors (Note 8) --- 2,818
Income per Common Share - Diluted
Income available to common
shareholders $ 1,893,000 397,471 $ 4.76

FOR THE YEAR ENDED 1995

Income (Loss) per Common Share - Basic
Income (loss) available to
common shareholders
before cumulative effect of
accounting change $ (579,000) 397,127 $ (1.46)
Cumulative effect of
accounting change 1,377,000 --- 3.47
Income available to common
shareholders $ 798,000 397,127 $ 2.01
Option issued to Directors
(Note 8) 1,398
Income (Loss) per Common
Share - Diluted
Income (loss) available to
common shareholders
before cumulative effect of
accounting change $ (579,000) 398,525 $ (1.45)
Cumulative effect of
accounting change 1,377,000 --- 3.45
Income available to common
shareholders $ 798,000 398,525 $ 2.00

Options to purchase approximately 20,100 shares of common stock at $31
per share were outstanding during 1997 but were not included in the
computation of diluted EPS because the options' exercise price was
greater than the average market price of the common shares. The options,
which expire 10 years from the date of grant, were still outstanding as
of December 31, 1997.

10. EMPLOYEE STOCK OWNERSHIP PLAN FINANCING TRANSACTION:

In December 1985, the Company's Employee Stock Ownership Plan (ESOP)
purchased on the open market 45,227 shares of the Company's common stock
for an aggregate purchase price of approximately $1,000,000. The shares
were solicited pursuant to a Schedule 13E-4 Tender Offer Statement.
Financing for the purchase was obtained by the ESOP through a ten-year
bank loan which bears interest at 9% per annum and was guaranteed by the
Company. In accordance with generally accepted accounting principles,
this loan was reflected as long-term debt in the Company's consolidated
balance sheets, with a corresponding charge to equity for the purchase
price of the related shares, less principal repayments on the bank loan.
The loan was repaid during 1995.

11. BORROWINGS:

Bank Borrowings

The Company had short-term lines of credit totaling $26,300,000 and
$23,081,000, of which $18,224,000 and $12,169,000 was in use, as of
December 31, 1997 and 1996, respectively. These loans bear interest at
not more than the prime rate. (The weighted average interest rate was
6.9% as of December 31, 1997 and 1996.) The Company maintains deposits
at several banks which serve various corporate purposes including the
support of its lines of credit available or in use. All lines of credit
are renegotiated annually.

Long-Term Debt
Long-term debt consists of the following at December 31, 1997 and 1996:

1997 1996
9% unsecured senior notes payable in
equal annual installments from
May 1, 1996 to 2002 $ 9,286,000 $ 11,143,000

7.3% unsecured term note payable in
equal semi-annual installments from
May 1, 1996 to November 1, 1997 --- 1,400,000
Other long-term debt 94,000 ---

Total 9,380,000 12,543,000
Less current portion 1,876,000 3,257,000

$ 7,504,000 $ 9,286,000

On May 1 and November 1, during the term of the 9% unsecured senior
notes, the Company has the option to prepay principal balances in
multiples of $100,000 plus accrued interest and a prepayment penalty.

The Company's long-term debt agreements contain restrictions on the
incurrence of debt, investments, dividend payments and the redemption of
capital stock and preferred stock. These long-term debt agreements
require that the Company maintain certain financial ratios and levels of
net worth. At December 31, 1997, the Company was in compliance with all
of these covenants.

Long-term borrowings maturing during the next five years are as follows:

1998 1,876,000
1999 1,871,000
2000 1,863,000
2001 1,863,000
2002 1,863,000

Based on the borrowing rates currently available to the Company for bank
loans with similar terms and average maturities, the estimated fair
market value of long-term debt was $9,543,000 as of December 31, 1997.

12. LEASE COMMITMENTS:

The Company leases warehouses, sales offices and computer equipment under
noncancelable lease agreements. Rental expense for all operating leases
was $5,877,000 in 1997, $5,721,000 in 1996 and $5,654,000 in 1995. As of
December 31, 1997, the future minimum rental commitments under
noncancelable leases that have terms in excess of one year are as
follows:

1998 $ 3,203,000
1999 2,330,000
2000 1,816,000
2001 1,105,000
2002 621,000
Subsequent years 302,000
Total minimum rental obligations $ 9,377,000

13. REDEEMABLE PREFERRED STOCK:

During 1992, the Company offered to exchange one share of preferred stock
with a par value of $1 per share for each share of the Company's
outstanding common stock up to a maximum of 350,000 common shares (the
Offer). A total of 349,864 common shares were exchanged in December 1992
in accordance with the Offer.

Dividends on the preferred stock accrue at an annual rate of $2.80 per
share. Such dividends are cumulative and payable quarterly in arrears
commencing January 1, 1993. At December 31, 1997 and 1996, the Company
had accrued $245,000 for such dividends. In the foreseeable future, the
Company does not expect to pay cash dividends on the outstanding common
shares at December 31, 1997. The preferred stock is nonvoting except in
certain circumstances.

On or after February 1, 1998, the Company may, at its option, redeem the
preferred stock, in whole or in part, initially at $31.50 per share and
declining to $30 per share on and after February 1, 2003, plus accrued
and unpaid dividends. Prior to February 1, 2013, the Company will not
have the right to redeem shares of preferred stock which have been
continuously owned beneficially by the holder thereof since the issuance
of the preferred stock in connection with the Offer, if such holder
elects to prohibit such redemption.

On December 1, 1998, and on each December 1 thereafter through and
including December 1, 2012, the Company will be obligated to redeem
shares of the preferred stock that any holders thereof have requested the
Company to redeem at $30 per share, plus accrued and unpaid dividends,
subject to an annual limitation on the number of shares that the Company
will be obligated to redeem.

The preferred stock has a liquidation value of $30 per share, plus
accrued and unpaid dividends thereon. The payment of dividends on, and
the redemption of, the preferred stock may be restricted by the terms of
Company loan agreements or by the terms of future financing arrangements.

14. ACCRUED LIABILITIES:

The components of accrued liabilities as of December 31, 1997 and 1996
are as follows:

1997 1996

Salaries and wages $ 2,590,000 $ 2,643,000
General, auto and other liability insurance 5,746,000 4,833,000
Other 4,495,000 4,777,000
$12,831,000 $12,253,000

15. RESTRUCTURING:

During 1996, the Company's principal contracting subsidiary, ACandS,
Inc., underwent an organizational restructuring. This restructuring
involved integrating numerous semi-autonomous branches into three highly
integrated regions in the interest of reducing administrative expenses
and providing more responsive services to customers. In conjunction with
this restructuring, ACandS, Inc. incurred expenses of approximately
$500,000, which primarily consisted of severance pay and lease
termination costs. Although the restructuring was essentially completed
during 1996, approximately $145,000 of expenses are included in 1997
results as reported.

16. NON-CURRENT LIABILITIES:

The components of non-current liabilities as of December 31, 1997 and
1996 are as follows:

1997 1996
Workers compensation and
other insurance $ 7,820,000 $ 8,087,000
Retirement benefits 824,000 1,040,000
$ 8,644,000 $ 9,127,000

17. SUBSEQUENT EVENT:

On January 19, 1998, the Company announced its intention to spin off one
of its subsidiaries, Specialty Products and Insulation Company (SPI).
The Company's Board of Directors, at its February 26, 1998 meeting,
approved the proposed transaction in which shareholders of Irex common
stock will receive a dividend of SPI common stock. This dividend is
expected to be a tax-free distribution to current shareholders of Irex
common stock. The transaction is expected to be completed by the middle
of 1998. Following the transaction, Irex will continue as a parent
company, providing administrative services to its three specialty
contracting companies. SPI will become a separate company, primarily
concentrating on specialty product distribution/fabrication in the
construction industry.

For the years ended December 31, 1997, 1996 and 1995, SPI had net
revenues of $149,053,000, $129,417,000, and $107,713,000, respectively;
gross profit was $34,096,000 in 1997, $31,110,000 in 1996, and
$25,892,000 in 1995. Total assets were $47,651,000 and $38,935,000 at
December 31, 1997 and 1996, respectively.
<PAGE>

IREX CORPORATION

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

For the Three Years Ended December 31, 1997

Balance at Additions Deductions Balance
Beginning Charged to from at End
of Period Income Reserve of Period

DEDUCTED FROM BALANCE SHEET
CAPTION TO WHICH IT APPLIES:
Reserve for Doubtful Accounts -

Year Ended
December 31, 1995 $1,430,000 $1,096,000 $(1,086,000) $1,440,000
Year Ended
December 31, 1996 $1,440,000 $1,164,000 $(1,014,000) $1,590,000
Year Ended
December 31, 1997 $1,590,000 $ 83,000 $ (864,000) $ 809,000

Item 9. Disagreements on Accounting and Financial Disclosure

Not Applicable

PART III

Item 10. Directors and Executive Officers

(a) Identification of Directors

Positions and Offices Held Period Held
Name (Age) and Other Directorships From To

William W. Adams (63) Director, Irex Corporation 1996 1998
(2) Former Chairman and President, 1988 1993
Armstrong World Industries, Inc.
Director, Bell Atlantic Corporation

Carlton E. Hughes (66) Director, Irex Corporation 1980 2000
(1) (4) Chairman, Stewart-Amos Steel, Inc.
(steel fabricator)
Director, CoreStates Financial
Corporation (bank holding company)
Director, Arnold Industries, Inc.

Joanne M. Judge (45) Director, Irex Corporation 1993 1999
(2) (3) Attorney, Stevens & Lee 1996 Present
Former President and Chief 1987 1993
Executive Officer, Community
Hospital of Lancaster

David C. Kleinman (62) Director, Irex Corporation 1984 1999
(3) Adjunct Professor of Strategic Management
University of Chicago
Graduate School of Business
Management Consultant
Director, Sonic Foundry, Inc. 1997 Present
Director, Inter-Americas
Communication Corp. 1977 Present
Director, Acorn Funds (Diversified 1972 Present
Common Stock Mutual Funds)
Director, Plymouth Tube Co. 1993 Present
Director, Wisconsin Paper and
Products Co. 1994 Present

Michael J. Lardner (54) Director, Irex Corporation 1989 1998
(2) Chairman, Wide World of Golf 1996 Present
President and Chief Operating Officer
High Construction, Inc. 1993 1996
(general contractor)
President, Chief Operating Officer, 1989 1992
Director, Horst Group

W. Kirk Liddell (48) Director, Irex Corporation 1980 2000
(1) (3) - Ex officio President and CEO, Irex Corporation
w/o vote) Director, High Industries, Inc.
(steel, real estate and other service company)
Director, Penn Fuel Gas, Inc.
(regulated gas distributor)

Wilson D. McElhinny (68)Director, Irex Corporation 1975 1999
(1) (3) (4) Director, Educators Mutual Life
Insurance Company
Director, Hunt Manufacturing Company
(office and art/craft product
manufacturer)

John O. Shirk (54) Director, Irex Corporation 1987 2000
(1) (4) Partner, Barley, Snyder, Senft
and Cohen (law firm)
Director, Fulton Financial Corporation
(bank holding company)
Director, Educators Mutual Life
Insurance Company

N. Thompson Washburn (68) Director, Irex Corporation 1980 1998
(1) (2) (4) Administrative Consultant,
Getty Petroleum Corporation
(petroleum distribution)

(1) - Member of the Executive Committee
(2) - Member of the Audit Committee
(3) - Member of the Governance Committee
(4) - Member of the Compensation and Benefits Committee

Note: Unless otherwise indicated, principal occupations listed were the
same for the past five years.

(b) Identification of Executive Officers

Positions and Offices Held
Name (Age) During Past Five Years

W. Kirk Liddell (48) President and Chief Executive Officer

James E. Hipolit (47) Senior Vice President, General Counsel
and Secretary since April 1997
Vice President, General Counsel
and Secretary from 1996 to April 1997
Vice President and General Counsel from 1986
to 1996

Jane E. Pinkerton (58) Senior Vice President Finance and
Administration since April 1997
Vice President, Finance and
Administration from 1996 to April 1997
Vice President, Administrative Services
and Secretary from 1992 to 1996;
Vice President and Director of Personnel
from 1988 to 1992

(d) Not Applicable.

(e) Business Experience. A brief account of the business experience
during the past five years of each director or executive officer and the
other directorships of registered companies held by each director has
been provided above.

(f) Involvement in Certain Legal Proceedings. None

(g) Not Applicable.

Item 11. Executive Compensation

Summary Compensation Table

The following table sets forth information required concerning cash and
noncash compensation of the Chief Executive Officer and the four other
most highly compensated executive officers for each of the last three
fiscal years.
<PAGE>
Annual Compensation Long-Term
Comp.
All Other
Name and Principal Year Salary($) Bonus($) Options(#) Comp.($)
Positions (1) (2)

W. K. Liddell 1997 296,000 43,808 500 8,116
President and Chief 1996 274,000 145,768 (3) 450 6,750
EXecutive Officer 1995 264,000 - - 8,274

J. E. Hipolit 1997 124,400 31,548 200 8,011
Senior Vice President, 1996 119,400 50,435 150 5,974
General Counsel and 1995 111,200 13,344 - 8,228
Secretary

J. E. Pinkerton 1997 116,200 29,468 200 7,831
Senior Vice President, 1996 103,700 42,686 150 5,021
Finance and Administration 1995 87,400 7,866 - 6,750

R. L. King (4) 1997 135,000 70,101 200 8,009
President, Specialty 1996 98,500 45,514 150 5,963
Products and Insulation Co.1995 93,200 34,007 1,000 5,463

D. F. Andrew (5) 1997 108,500 26,887 200 6,316
President, ACandS, Inc. 1996 101,000 16,533 150 5,081

1995 97,000 11,910 - 4,917

(1) Bonus amounts for the year represent bonuses accrued for the
calendar year listed but paid in the following calendar year.

(2) Includes amounts earned under the Company's Savings Incentive Plan
and Employee Stock Ownership.

Savings Incentive Plan.

The Company offers a Savings Incentive Plan for all salaried employees
whereby they can elect to contribute up to 15% of their salary and
incentive compensation into accounts in their names which are
independently managed and invested. Pursuant to amendments adopted by
the Board of Directors which became effective January 1, 1985, the
employees' contributions to the Plan were made in accordance with the
provisions of Section 401(k) of the Internal Revenue Code. The Company's
match is 75% of the first 6% of employee contributions. One-third of the
Company's match is invested in Irex Corporation common stock and is
subject to the Company achieving a specific financial performance target.

On December 31, 1997 there were 315 employees of the Company and its
subsidiaries participating in the Savings Incentive Plan and 30,895
shares of common stock held by such Plan.

Employee Stock Ownership Plan.

Effective January 1, 1983, the Company established an Employee Stock
Ownership Plan (ESOP) and Trust for the benefit of employees, of which W.
Kirk Liddell, Ronald L. King, and Jane E. Pinkerton are trustees. All
salaried employees of the Company and its U.S. subsidiaries automatically
become participants in the ESOP on the January 1 following their date of
hire. Participants are neither required nor permitted to make
contributions to the ESOP. Contributions to the Plan are based upon the
Company's achievement of specific financial performance targets. In
1997, a $100,000 contribution was made.

On December 31, 1997, there were 320 employees of the Company and its
subsidiaries eligible to participate in the ESOP and the total of 36,354
shares of common stock held by the ESOP were fully allocated to such
participants' accounts.

(3) Mr. Liddell's bonus also included a grant of 620 shares of Irex
Corporation stock valued at $13,562.

(4) Mr. King is included in his capacity as President of a major wholly-owned
subsidiary of the Company.

(5) Mr. Andrew is included in his capacity as President of a major
wholly-owned subsidiary of the Company.

Stock Option Plans

On February 28, 1990, the Board of Directors of the Company adopted the
Irex Corporation Non-Qualified Stock Option Plan under which options to
purchase not more than 200,000 shares of the Company's common stock may
be granted over the next ten years to employees of the Company and its
subsidiaries. The number of shares available for options was reduced
during 1995 from 200,000 shares to 55,000 shares. The recipients of
options and the number of options granted to them are determined by the
Compensation and Benefits Committee of the Board of Directors. Unless
otherwise determined by the Compensation and Benefits Committee, no
option may be exercised before three years nor more than ten years after
the date of grant. On July 20, 1994, the Board of Directors amended the
plan to provide that Fair Market Value on the date of the grant shall be
defined as (i) the mean between the highest and lowest prices of actual
sales of Shares on the principal national securities exchange on which
the Shares are listed on such date, or, (ii) if there are no such sales
on such date, the mean between the closing bid and asked prices of the
Shares on such exchange on such date, or, (iii) if the Shares are not
listed on any national securities exchange, the mean between the closing
high bid and low asked prices of the Shares in over-the-counter trading
as identified by the National Quotation Bureau or other comparable source
selected by the Committee, or (iv) if the Committee determines that the
mean is not an accurate reflection of the market value of the Shares, the
fair market value as determined for purposes of the Company's Employee
Stock Ownership Plan, less a discount reflecting the lack of liquidity of
Shares in the open market, or, (v) if the Company's Employee Stock
Ownership Plan has terminated, or has failed to provide a current
valuation of the Shares for any other reason, the fair market value as
determined by a disinterested third party selected by the Committee and
qualified to perform an evaluation of the Shares. Prior to this
amendment, the option price was established at the fair market value as
determined for purposes of the Company's Employee Stock Ownership Plan,
less a discount reflecting the lack of liquidity of shares in the open
market. The following table sets forth, for the individuals named,
options granted during 1997.

INDIVIDUAL GRANTS
Potential realizable
Percent value at assumed annual
of Total Exercise rates of stock price
Options Price appreciation for
Options Granted to Per Expiration option term (1)
Name Granted Employees Share Date 5% ($) 10%($)
(#)
W. K. Liddell 500 5.8% $21.875 12/31/07 6,900 17,400
J. E. Hipolit 200 2.3% $21.875 12/31/07 2,760 6,960
J. E. Pinkerton 200 2.3% $21.875 12/31/07 2,760 6,960
R. L. King 200 2.3% $21.875 12/31/07 2,760 6,960
D. F. Andrew 200 2.3% $21.875 12/31/07 2,760 6,960

(1) The potential realizable value of each grant of options assuming
that the market price of the underlying security appreciates in value
from the date of grant to the end of the option term at the indicated
annualized rate. The actual value, if any, an executive may realize will
depend on the excess of the stock price over the exercise price on the
date the option is exercised.

Number of Value of Unexercised
Unexercised Options In-the-Money Options
Name Exercisable Unexercisable Exercisable Unexercisable

W. K. Liddell 15,500 950 $ 34,125 $5,230
J. E. Hipolit 2,750 350 11,375 1,930
J. E. Pinkerton 2,000 350 11,375 1,930
R. L. King 1,000 350 11,375 1,930
David F. Andrew 2,000 350 11,375 1,930

For the year ended December 31, 1997, there were 4,600 options granted to
management and no options were exercised by management. The above table
sets forth information as to the aggregate options granted and
outstanding as of December 31, 1997, for the individuals named.

Retirement Income Plan Table

The Company's Retirement Income Plan which became effective September 1,
1984, covers all salaried employees. All costs are paid by the Company,
and the amount of retirement income is determined by the career average
rate of compensation and length of credited service at retirement.
Effective January 1, 1989, the Plan provides for an annual benefit based
on 1% of annual compensation up to the Social Security covered
compensation level and 1.5% of compensation over that level.

The Retirement Income Plan in effect prior to the adoption of this Plan
provided for benefits based on the final five years average compensation
and length of service at retirement. Assets of the former Plan
sufficient to fund all accrued benefits under that Plan for participants
were used to purchase annuities for the participants or transferred to
the participants' accounts in the Savings Incentive Plan.

The following table sets forth required Pension Plan information for the
Chief Executive Officer and the four other most highly compensated
executive officers.
Estimated Annual
Name of Individual Amounts Transferred Benefits Upon
or Number of from Retirement Under
Persons in Group Former Plan New Plan

W. Kirk Liddell $ 3,025 $69,670
James E. Hipolit 1,176 50,991
Jane E. Pinkerton 7,500 22,970
Ronald L. King - 26,341
David F. Andrew 9,695 38,147

Compensation of Directors

All Directors who are not officers of the Company receive an annual fee
of $9,500 and $750 per board meeting attended. The Board of Directors
has various committees as identified in Item 10 (a), above, and the
outside directors on those committees receive $750 per committee meeting
attended. Directors who are officers of the Company or its subsidiaries
receive no additional compensation for attendance at meetings of the
board or board committees. The Chairman of the Board of the Company
receives an additional annual fee of $20,500, $3,000 of which shall be
paid in Irex common stock

On April 28, 1994, the shareholders approved a Non-Qualified Stock Option
Plan for Outside Directors of the Company. This plan authorized the
granting of options on 25,000 shares of Common Stock to directors who are
not employees of the Company. Each outside director automatically
receives an option to purchase 500 shares as of January 1, 1994 and each
January 1 thereafter through and including January 1, 1998. Options are
granted at Fair Market Value consistent with the pricing mechanism
established under the Non-Qualified Stock Option Plan for employees.
Options are exercisable at any time more than one year from the date of
grant, but no more than ten years from the date of the grant.

Item 12. Security Ownership of Certain Beneficial Owners and
Management

(a) Security Ownership of Certain Beneficial Owners

Following is a list of the persons known by the Company to be the
beneficial owners of more than five percent of the Company's Common
Stock, as of March 23, 1998.

Name and Address of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership of Class

W. Kirk Liddell 64,006 Shares (1) 15.79%
175 River Hill Road
Conestoga, PA 17516

(1) Does not include 14,217 shares in wife's name to which Mr. Liddell
disclaims beneficial ownership. Includes 39,124 shares beneficially
owned by dependent children, 883 allocated shares in the Irex Corporation
Employees' Stock Ownership Plan, and 713 shares in the Irex Corporation
Savings Incentive Plan (401k).

Lynn Liddell 24,968 shares 6.16%
740 Curtiswood Drive
Key Biscayne, FL 33149

Following is a list of the persons known by the Company to be the
beneficial owners of more than five percent of the Company's Preferred
Stock, as of March 23, 1998.

Lynn Liddell 26,682 shares 7.63%
740 Curtiswood Drive
Key Biscayne, FL 33149

(b) Security Ownership of Management

The amounts of the Company's Common and Preferred Stock held directly or
indirectly by the directors, and by the directors and executive officers
as a group, are shown below as of March 23, 1998. Unless otherwise described
in the footnotes following the listing, in each case the beneficial ownership
represents the sole voting and investment power.

Amount Held Percent of Class
Common Preferred Common Preferred

William Adams 2,108 (2) - .52 -
David Andrew 3,395 (1)(6) - .84 -
James Hipolit 4,533 (1)(5) - 1.12 -
Carlton Hughes 6,165 (2 - 1.52 -
Joanne Judge 3,898 (2) - .96 -
Ronald King 2,200 (2)(7) 136 (7) .54 .03
David Kleinman 2,700 (2) - .67 -
Michael Lardner 2,658 (2) - .66 -
W. Kirk Liddell 64,006 (3) - 15.79 -
Wilson McElhinny 9,153 (2) - 2.26 -
Jane Pinkerton 2,382 (1) - .59 -
John Shirk 4,636 (8) - 1.14 -
N. Thompson Washburn 3,544 (4) - .87 -

(1) Includes allocated shares in the Irex Corporation Employees'
Stock Ownership Plan and allocated shares in the Irex Corporation Savings
Incentive Plan (401k) as follows, respectively: Mr. Hipolit, 557 and
476; Ms. Pinkerton, 373 and 351; Mr. Andrew, 524 and 421; and Mr. King,
129 and 221.

(2) Includes options granted but not exercised under the Company's
non-qualified stock option plans as follows. Mr. Adams, 500; Mr. Hughes,
500; Ms. Judge, 2,500; Mr. King, 1,350; Mr. Kleinman, 2,500; Mr. Lardner,
2,500; Mr. McElhinny, 500.

(3) Does not include 14,217 shares in spouse's name to which Mr.
Liddell disclaims beneficial ownership. Included 39,124 shares
beneficially owned by dependent children, 883 allocated shares in the
Irex Corporation Employees' Stock Ownership Plan, and 713 shares in the
Irex Corporation Savings Incentive Plan (401k).

(4) Includes 200 shares to which Mr. Washburn shares voting and
investment power.

(5) Includes 3,500 shares to which Mr. Hipolit shares voting and
investment power.

(6) Includes 100 shares to which Mr. Andrew shares voting and
investment power.

(7) Does not include 300 shares of preferred stock in spouse's
name to which Mr. King disclaims beneficial ownership. Includes 500
common shares and 136 preferred shares to which Mr. King shares voting
and investment power, 129 allocated shares in the Irex Corporation
Employee's Stock Ownership Plan, and 221 shares in the Irex Corporation
Savings Incentive Plan (401k).

(8) Includes 100 shares beneficially owned by a dependent child,
550 shares beneficially owned by spouse, and 2,500 shares to which Mr.
Shirk shares voting and investment power.

Item 13. Certain Relationships and Related Transactions

(a) Transactions with Management and Others

None

(b) Certain Business Relationships

None

(d) Transactions with Promoters

None

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K

(a) Documents filed as part of this report

1. See Item 8

2. See Item 8

3. Exhibits required to be filed by Item 601 of Regulation S-K
(Exhibit numbers correspond to those in the Exhibit Table, Item 601,
Regulation S-K)

(3) The Articles of Incorporation of the Company filed as an
exhibit to the Company's 1982 Annual Report on Form 10-K are hereby
incorporated by reference. An amendment to the Articles of
Incorporation, changing the Company's name, filed as an exhibit to the
Company's 1983 Annual Report on Form 10-K is hereby incorporated by
reference. An amendment to the Articles of Incorporation, which includes
the authorization of Preferred Stock, cumulative voting, term and number
of directors and limits to the number of employees on the Board of
Directors, filed as an exhibit to the Company's 1992 Annual Report on
Form 10-K is hereby incorporated by reference.

(4) The Form of Stock Certificate filed as an exhibit to the
Company's 1980 Annual Report on Form 10-K is hereby incorporated by
reference. A revised Form of Stock Certificate reflecting the Company's
name change filed as an exhibit to the Company's 1983 Annual Report on
Form 10-K is hereby incorporated by reference.

(9) None

(10) None

(11) Not Applicable

(12) Not Applicable

(13) Annual Report To Shareholders - See Supplemental
Information below.

(16) Not Applicable

(18) Not Applicable

(19) Not Applicable

(21) A chart showing the subsidiaries of the registrant is filed
as an exhibit to this report.

(22) Not Applicable

(23) Not Applicable

(24) Not Applicable

(27) Not Applicable

(28) Not Applicable

(99) Not Applicable

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the last quarter of 1997.

(d) See Item 8

Supplemental Information

Copies of the Company's 1997 Annual Report to Security Holders, 1998
Proxy Statement, and 1998 Proxy are being furnished to the Commission for
its information under separate cover.

<PAGE>

SUBSIDIARIES OF THE REGISTRANT

IREX CORPORATION
A Pennsylvania Corporation

IREX FINANCIAL
CORPORATION
A Delaware Corporation
Wholly Owned Subsidiary of
Irex Corporation

CENTIN
CORPORATION
A Pennsylvania Corporation
Wholly Owned Subsidiary
of Irex Corporation

SPECIALTY PRODUCTS
AND INSULATION CO.
A Pennsylvania Corporation
Wholly Owned Subsidiary
of Irex Corporation

ACandS, Inc.
A Delaware Corporation
Wholly Owned Subsidiary
of Irex Corporation

SPACECON, Inc.
A Delaware Corporation
Wholly Owned Subsidiary
of Irex Corporation

ACandS Contracting Ltd.
Incorporated in Dominion
of Canada
Wholly Owned Subsidiary
of ACandS, Inc.

ALL OF THE ABOVE CORPORATIONS ARE INCLUDED IN THE CONSOLIDATED FINANCIAL
STATEMENTS

CHART #9 MARCH 1998<PAGE>

SIGNATURES

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

IREX CORPORATION

By /S/J. E. Pinkerton 3/31/98
J. E. Pinkerton Date
Senior Vice President, Finance and Administration
(Principal Financial 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.

By /S/W. K. Liddell 3/31/98
W. K. Liddell Date
President and Director
(Principal Executive Officer)

By /S/J. E. Pinkerton 3/31/98
J. E. Pinkerton Date
Sr. Vice President, Finance and Administration
(Principal Financial Officer)

By /S/B. C. Werner 3/31/98
B. C. Werner Date
Director, Management Accounting
(Principal Accounting Officer)

By /SW. W. Adams 3/31/98
W. W. Adams, Director Date

By /S/C. E. Hughes 3/31/98
C. E. Hughes, Director Date

By /S/J. M. Judge 3/27/97
J.M. Judge, Director Date

By /S/D. C. Kleinman 3/31/98
D. C. Kleinman, Director

By /M. J. Lardner 3/31/98
M. J. Lardner, Director

By /W. D. McElhinny 3/31/98

By /S/J. O. Shirk 3/31/98
J. O. Shirk, Director Date

By /S/N. T. Washburn 3/27/97
N. T. Washburn, Director Date

<ARTICLE> 5

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