LONE STAR INDUSTRIES INC, 10-K, 1998-03-06

LONE STAR INDUSTRIES INC
10-K, 1998-03-06
CEMENT, HYDRAULIC

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-06124

LONE STAR INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C>
DELAWARE NO. 13-0982660
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
300 FIRST STAMFORD PLACE
STAMFORD, CT 06912-0014
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 969-8600

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

<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH EACH CLASS REGISTERED
------------------- ------------------------------
<S> <C>
Common Stock, par value $1.00 New York Stock Exchange
per share
Common Stock Purchase Rights New York Stock Exchange
Common Stock Purchase Warrants New York Stock Exchange
</TABLE>

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 this Form 10-K or any amendment to this
Form 10-K. [X]

Aggregate market value of the voting stock held by non-affiliates of the
registrant at March 2, 1998: approximately $599,437,000.

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of Securities under a plan
confirmed by a court. Yes [X] No [ ]

The number of shares outstanding of each of the registrant's classes of
common stock as of March 2, 1998: Common Stock, par value $1.00 per share, --
10,707,623 shares.

PORTIONS OF THE PROXY STATEMENT OF THE REGISTRANT FOR THE ANNUAL MEETING OF
STOCKHOLDERS TO BE HELD ON MAY 14, 1998 ARE INCORPORATED IN PART III OF THIS
REPORT.

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
PART I ----
<S> <C> <C>
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 7
Item 3. Legal Proceedings........................................... 7
Item 4. Submission of Matters to a Vote of Security Holders......... 8

PART II
Item 5. Market for the Registrant's Common Equity and Related 9
Stockholder Matters.......................................
Item 6. Selected Financial Data..................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition 11
and Results of Operations.................................
Item 8. Consolidated Financial Statements and Supplementary Data.... 17
Item 9. Changes in and Disagreements with Accountants on Accounting 39
and Financial Disclosure..................................

PART III
Item 10. Directors and Executive Officers of the Registrant.......... 39
Item 11. Executive Compensation...................................... 39
Item 12. Security Ownership of Certain Beneficial Owners and 39
Management................................................
Item 13. Certain Relationships and Related Transactions.............. 39

PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 40
8-K.......................................................
</TABLE>
<PAGE> 3

PART I

ITEM 1. BUSINESS.

THE COMPANY

Lone Star is a cement and ready-mixed concrete company with operations in
the midwestern and southern United States. Lone Star's cement operations consist
of five portland cement plants in the Midwest and Southwest, a slag cement
grinding facility in New Orleans and a 25% interest in Kosmos Cement Company, a
partnership which owns and operates one portland cement plant in Kentucky and
one in Pennsylvania ("Kosmos"). The Company's five wholly-owned portland cement
plants produced approximately 3.9 million tons of cement during 1997, which
approximates the rated capacity of the plants. In addition, the Company's New
Orleans facility produced 190,000 tons of slag cement during 1997. The Company's
ready-mixed concrete business owns or leases and operates several facilities in
the Memphis, Tennessee area. In 1997, the Company had net sales of approximately
$357.6 million.

Lone Star Industries, Inc. was incorporated in Maine in 1919 as
International Cement Corporation and, in 1936, changed its name to Lone Star
Cement Corporation. In 1969, its state of incorporation was changed to Delaware
and in 1971 its name was changed to Lone Star Industries, Inc. On April 14,
1994, the Company emerged from proceedings under Chapter 11 of the United States
Bankruptcy Code. The Company's executive offices are located at 300 First
Stamford Place, Stamford, Connecticut 06912-0014 and its telephone number is
(203) 969-8600. Unless the context otherwise requires, as used herein "Company"
and "Lone Star" mean Lone Star Industries, Inc. together with its consolidated
subsidiaries.

CEMENT OPERATIONS

Portland cement is the primary binding material used in the production of
concrete. The principal raw materials used in the manufacture of cement are
limestone or other calciferous materials, shale or clay, and sand. These raw
materials are crushed, ground, mixed together and then introduced into a rotary
kiln where they are heated to approximately 2700 degrees Fahrenheit. The
resultant marble-sized intermediate material produced by this process is known
as clinker. Clinker is then cooled, blended with a small amount of gypsum, and
ground to the consistency of face powder to produce cement.

Clinker can be produced utilizing either of two basic methods, a "wet" or a
"dry" process. In the wet process, the raw materials are mixed with water to
form a slurry prior to introduction into the rotary kiln. The wet process has
the advantage of greater ease in the handling and mixing of the raw materials,
however additional heat, and therefore fuel, is required to evaporate the
moisture before the raw materials can react to form clinker. The dry process, a
newer more fuel efficient technology, excludes the addition of water into the
process. Dry process plants are either pre-heater plants, in which hot air is
recycled from the rotary kiln to pre-heat materials, or are precalciner plants,
in which separate burners are added to accomplish a significant portion of the
chemical reaction prior to the introduction of the raw materials into the kiln.

Whether a wet or dry method is utilized, the manufacture of cement is
energy intensive, and the cost of such energy accounts for approximately one
fourth of a cement plant's total manufacturing costs. Energy cost, and in
particular coal, varies on a regional basis due in large part to transportation
costs. In addition, the low value-to-weight ratio of cement and its constituent
raw materials results in relatively high transportation costs, creating a
largely regional business. As a result, proximity to sources of fuel and raw
materials, as well as markets, are important aspects in the profitability of a
cement plant. While subject to fluctuation and interruption resulting from
adverse weather and other factors, distribution by water is generally the least
expensive method of transporting cement.

Lone Star's cement operations consist principally of the production of Type
I portland cement at the Company's five owned cement plants and the distribution
of that cement through the Company's 15 owned or leased distribution terminals.
Other products manufactured at certain of these plants include Type III portland
cement, which is a high early strength cement required in certain applications,
and specialty cements, such as masonry and oil well cement. Slag cement, a
by-product of iron blast furnaces that may be utilized in certain instances in
lieu of portland cement, is ground and distributed from the Company's New
Orleans facility. The Company also purchases cement from both domestic and
<PAGE> 4

international sources for domestic resale. In addition, Lone Star owns a 25%
interest in Kosmos, which owns and operates one cement plant in Kentucky and one
in Pennsylvania.

All of Lone Star's five portland cement plants are fully integrated from
limestone mining through cement production, and the Company estimates that it
has limestone reserves sufficient to permit operation of these plants at current
levels of production for periods ranging from 30 to 100 years. Adequate supplies
of other raw materials such as gypsum, shale, clay and sand are owned, leased or
available for purchase by Lone Star. The Company believes that its plants have
adequate sources from which to purchase power and fuel.

The following table sets forth certain information regarding Lone Star's
portland and slag cement plants and their markets.

<TABLE>
<CAPTION>
TONS OF
RATED ANNUAL
PLANT LOCATION CEMENT CAPACITY PROCESS FUEL PRINCIPAL MARKET AREA
-------------- --------------- --------------- --------------------- ------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
PORTLAND CEMENT
- -------------------------------------
Cape Girardeau, Missouri............. 1,200* Dry/Precalciner Coal-Waste-Tires E. Missouri; Central and
N.E. Arkansas;
Mississippi; S.
Louisiana; N. Alabama;
Tennessee; N.W.
Kentucky; S.W. Illinois
Greencastle, Indiana................. 750 Wet Coal-Waste Indianapolis and other
areas of Indiana; S.E.
Illinois; N. Central
Kentucky
Pryor, Oklahoma...................... 725 Dry Coal-Coke-Natural Gas Oklahoma; Dallas, Texas;
Kansas; W. Missouri
Oglesby, Illinois.................... 600 Dry Coal-Coke-Tires Chicago and other areas
of Northern and Central
Illinois; S. Wisconsin
Maryneal, Texas...................... 520 Dry/Preheater Coal-Coke-Natural Gas W. Texas; Dallas, Texas
Kosmos Cement Company:
Kosmosdale, Kentucky............... 875* Dry/Preheater Coal-Oil Kentucky; S. Indiana; S.
Ohio; W. Virginia
Pittsburgh, Pennsylvania........... 400 Wet Coal W. Pennsylvania; W.
Virginia; E. Ohio
SLAG CEMENT
- -------------------------------------
New Orleans, Louisiana............... 600 Grinding Natural Gas S. Alabama; S.W.
Facility Georgia; S.W.Louisiana;
Mississippi; Dallas,
Texas; Florida Panhandle
</TABLE>

- ---------------
* Capital projects have been announced to increase the cement capacity of these
two plants to 1.3 million tons, in the case of Cape Girardeau, and 1.38
million tons, in the case of Kosmosdale.

Cape Girardeau Complex. Lone Star's Cape Girardeau, Missouri plant is
located on the Mississippi River, and its related terminals are located along
the Mississippi and certain of its tributaries. Approximately 80% of the plant's
cement production is shipped up and down these rivers via 19 owned barges,
enabling the plant to serve a relatively wide market. Trucks and rail are also
available to transport product. The Cape Girardeau plant includes a modern
dry/precalciner kiln and burns hazardous waste fuels. See
"Business -- Environmental Regulation". The Company has begun certain capital
projects, anticipated to be on line by the second quarter of 1998, to increase
the capacity of this plant by 100,000 tons. The distribution terminals
supporting the Cape Girardeau plant are located in St. Louis, Missouri; Paducah,
Kentucky; and Nashville, Knoxville and Memphis, Tennessee. In addition to its
other customers, this complex supplies cement to Lone Star's ready-mixed
concrete operations in Memphis, Tennessee.

Greencastle Complex. Lone Star's Greencastle plant is located
approximately 40 miles southwest of Indianapolis, Indiana and is the nearest
cement plant to this market, providing a freight cost advantage. Product is
transported by truck to Indianapolis and by truck or rail to other markets. A
portion of the Greencastle plant's production is a high quality

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Type III portland cement which commands a premium price relative to Type I
portland cement, the Company's primary product. Although the Greencastle plant
utilizes the wet process of clinker production, the relative fuel inefficiency
of this process is offset in part by the plant's relatively low power and coal
costs and relatively high labor productivity. This plant also burns hazardous
waste fuels. See "Business -- Environmental Regulation". The Greencastle complex
has distribution terminals located in Fort Wayne and Elkhart, Indiana; and has a
warehousing and distribution arrangement in Itasca, Illinois.

Pryor Complex. The Pryor plant is located approximately 50 miles northeast
of Tulsa, Oklahoma and serves the Kansas; Oklahoma; and Dallas, Texas markets by
truck and rail. A portion of the plant's product is transported by barge. This
plant produces both portland and oil well cement. The plant has relatively low
power costs due to its proximity to two low-cost sources. The complex has
distribution terminals located near Wichita and Kansas City, Kansas; near
Oklahoma City, Oklahoma; and in Dallas, Texas.

Oglesby Complex. The Oglesby plant is located approximately 100 miles from
Chicago and serves that and other northern and central Illinois construction
markets by truck and rail. The complex has a distribution terminal located in
Milwaukee, Wisconsin.

Maryneal Complex. The Maryneal plant produces both portland and oil well
cement and serves the western Texas market by truck and rail. The complex has a
distribution terminal located in Amarillo, Texas and also shares the use of the
Dallas, Texas terminal with the Company's Pryor plant.

Kosmos Cement Company. Lone Star owns a 25% interest in Kosmos, which owns
and operates a cement plant in Kosmosdale, Kentucky and one in Pittsburgh,
Pennsylvania. Southdown, Inc., a publicly-traded cement company, owns the
remaining 75% interest and is responsible for managing day-to-day operations.
All major decisions relating to Kosmos, however, require unanimous approval of
its management committee which includes a Lone Star representative. Kosmos has
recently announced a planned expansion of its Kentucky plant, which will add
500,000 tons of production capacity. This expansion will be conditioned on
approval of the partners' boards of directors.

New Orleans Facility. The New Orleans facility, which is located on a
canal off the Gulf Intercoastal Waterway and can accommodate oceangoing vessels,
is the site of a former Lone Star cement plant. The facility underwent
significant capital expansion during 1997 and now consists of a slag cement
grinding and storage facility with 600,000 tons of capacity, a distribution
terminal used for receiving and storing cement from the Company's Cape Girardeau
and Pryor plants as well as from international sources and a stevedoring
operation which includes a transloading system for moving phosphate materials
between barges and railcars. Cement distributed through this facility is sold
directly from the New Orleans facility or from terminals in Brandon,
Mississippi; St. Louis, Missouri; Memphis, Tennessee; and Dallas, Texas.

READY-MIXED CONCRETE OPERATIONS

Ready-mixed concrete, a versatile building material used in almost all
construction, is produced by mixing stone, sand, water and admixtures with
cement. Lone Star's ready-mix operations are located in Memphis, Tennessee, and
much of the cement used in these operations comes from the Company's Cape
Girardeau, Missouri plant via the Mississippi River. This vertical integration
has enabled the Company to become a major supplier of ready-mixed concrete to
this market.

CONSTRUCTION INDUSTRY CONDITIONS

The markets for the Company's products are highly competitive. Portland
cement is largely a commodity product, and due to this lack of product
differentiation, the Company competes with domestic and international sources of
cement largely on the basis of price. Accordingly, cement prices and the level
of the Company's profitability are very sensitive to small shifts in supply and
demand in the Company's markets, and the Company's ability to compete
effectively is dependent on its operating costs being at acceptable levels. To a
lesser extent, other competitive factors such as service, delivery time and
proximity to customers affect the Company's performance.

Construction spending and cement consumption historically have fluctuated
widely. Demand for cement is derived primarily from public (infrastructure)
construction, residential construction and commercial/industrial construction,
which are highly cyclical and, in turn, are influenced by prevailing economic
conditions, including availability of public funds and interest rate levels.
Moreover, due to cement's low value-to-weight ratio, the industry is largely
regional, with

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sales in a given market dependent on regional demand which is tied to local
economic factors that may fluctuate more widely than those of the United States
as a whole. In addition, the supply of cement from domestic and foreign sources
can vary from region to region and over time. As a result, even though the
Company sells in more than one area of the country, its operating results are
subject to significant fluctuation. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations". While sales by Lone Star
directly to federal, state and local governmental agencies are not significant,
customers of Lone Star are engaged in a substantial amount of construction in
which government funding is a component.

According to statistics compiled by the United States Bureau of Mines, the
1980's were a period of relatively high cement imports, which the Company
attributes in large part to low ocean shipping rates and excess foreign capacity
relative to demand, factors that typically affect the level of cement imports.
This high level of imports negatively affected the selling price of cement in
many regional markets, and published sources indicate that, despite strong U.S.
demand for cement, cement prices remained in a narrow range during this period.
Recent improvement in the performance of the United States economy, coupled with
lower imports, has led to a more favorable supply/demand ratio for cement
suppliers, which enabled the Company to implement price increases in 1995, 1996
and, to a lesser extent, 1997. The Company has announced additional cement price
increases effective April 1998, however, these and future prices will be subject
to market forces over which the Company has no influence. In this regard, it is
not known what, if any, effect the recent widely reported economic downturn in
Asia will have on the domestic cement industry.

The Company believes that lower import levels during the 1990's are
attributable in large part to anti-dumping orders that were imposed on cement
imported from Mexico and Japan and a suspension agreement signed by Venezuelan
exporters requiring them not to export to the United States at dumped prices.
The United States Department of Commerce conducts annual administrative reviews
to determine the actual anti-dumping duties to be assessed under the
anti-dumping orders. Notwithstanding amendments to the anti-dumping provisions
enacted as a result of the Uruguay Round of world trade negotiations under the
General Agreement on Tariffs and Trade ("GATT") and significant lobbying and
litigation by Mexican cement producers, which are ongoing, the Company believes
that the U.S. anti-dumping law currently provides effective remedies against
unfairly priced imports. The existing anti-dumping orders and suspension
agreement have contributed substantially to an improvement in the condition of
the U.S. cement industry. The anti-dumping orders and the suspension agreement
are scheduled to remain in effect at least until the year 2000 and may continue
thereafter if petitioners prevail in "sunset reviews" before the Commerce
Department and the U.S. International Trade Commission. Sunset reviews on cement
from Mexico and Japan and the Venezuelan suspension agreement are currently
scheduled to begin in August 1999, which would mean that any termination would
not occur before August 2000.

According to published sources, the United States cement industry is
comprised of approximately 50 companies with an annual cement production
capacity in the 85 to 87.5 million ton range. The ten largest companies account
for approximately 60% of the total domestic productive capacity. Due in part to
the existing anti-dumping relief, Lone Star and many of its competitors have
announced plans to increase their production capacity which, if implemented,
could increase this capacity by approximately 9 million tons over the next
several years through modifications to existing facilities and the construction
of three new cement plants. While the Company continues to believe that
significant new domestic production capacity will be costly to producers due to
the high cost of new plants and a stringent environmental regulatory framework,
no assurances can be given as to the long term effects of increased production
and, due to the regionalized nature of the industry, certain markets could be
affected by increased production more than other markets.

Construction spending and cement consumption are seasonal, particularly in
the Company's northern markets where colder weather affects construction
activity. Other adverse weather conditions such as flooding, which can interrupt
production and transportation of cement, and extreme heat, which can affect
concrete pouring, also affect the Company's operations.

CUSTOMERS AND MARKETING; BACKLOG

The Company's customer base primarily consists of ready-mixed concrete
producers, prestressed concrete producers, other concrete product producers and
highway construction firms. Taken as a whole, no single customer of the Company
accounted for more than 10% of total sales during 1997. The Company's marketing
effort is handled by local sales forces. Most purchases of the Company's
products are done on a spot basis, and accordingly, order backlogs are not
significant.

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ENVIRONMENTAL REGULATION

The Company is subject to extensive, stringent and complex federal, state
and local laws, regulations and ordinances pertaining to the quality and the
protection of the environment and human health and safety, requiring the Company
to devote substantial time and resources in an effort to maintain continued
compliance. Many of the laws and regulations apply to the Company's former
activities, properties and facilities as well as its current operations. There
can be no assurances that judicial or administrative proceedings, seeking
penalties or injunctive relief, will not be brought against the Company for
alleged non-compliance with applicable environmental laws and regulations
relating to matters as to which the Company is currently unaware. For instance,
if releases of hazardous substances are discovered to have occurred at
facilities currently or previously owned or operated by the Company, or at
facilities to which the Company has sent waste materials, the Company may be
subject to liability for the investigation and remediation of such sites. In
addition, changes to such regulations or the enactment of new regulations in the
future could require the Company to undertake capital improvement projects or to
cease or curtail certain operations or could otherwise substantially increase
the capital, operating and other costs associated with compliance. For example,
recent initiatives for limitations on carbon dioxide emissions as a result of
the fear of global warming could result in statutes or regulations which, if
promulgated, could adversely affect certain aspects of United States
manufacturing, including the cement industry.

The federal Water Pollution Control Act, commonly known as the Clean Water
Act, provides a comprehensive federal regulatory scheme governing the discharge
of pollutants to waters of the United States. This regulatory scheme requires
that permits be secured for discharges of wastewater, including stormwater
runoff associated with industrial activity, to waters of the United States. The
Company has secured or has applied for all required permits in connection with
its wastewater and stormwater discharges.

The Clean Air Act was amended in 1990 to provide for a uniform federal
regulatory scheme governing the control of air pollutant emissions and permit
requirements. In addition, certain states in which the Company operates have
enacted laws and regulations governing the emission of air pollutants and
requiring permits for sources of air pollutants. As a result of the 1990
amendments to the Clean Air Act, the Company is required to apply for federal
operating permits for each of its cement manufacturing facilities at various
dates through 1999. As part of the permitting process, the Company may be
required to install equipment to monitor emissions of air pollutants from its
facilities. In addition, the Clean Air Act amendments require the United States
Environmental Protection Agency ("EPA") to develop regulations directed at
reducing emissions of toxic air pollutants from a variety of industrial sources,
including the portland cement manufacturing industry. As part of this process,
the EPA will identify maximum available control technology ("MACT") for the
reduction of emissions of air toxics from cement manufacturing facilities. On
April 27, 1997, the EPA announced new proposed MACT standards for those cement
manufacturing facilities (like Lone Star's Greencastle and Cape Girardeau
plants) that burn hazardous waste fuels ("HWF"). The proposed standards are
extremely lengthy and complex and have been commented on by concerned parties.
They are anticipated by the Company to be effective in late 1998 and thereafter
will be implemented over a three-year period. Depending on their final terms
when effective, they could have the effect of limiting or eliminating the use of
HWF at one or both facilities. The Company anticipates that standards for
facilities burning fossil fuels will be initially proposed in 1998. In August
1997, the EPA promulgated under the Clean Air Act new standards for small
particulate matter and ozone emissions, and related testing will be carried out
over the next several years. Depending on the results of this testing,
additional regulatory burdens could be imposed on the cement industry by states
not in compliance with the regulations. On October 10, 1997, the EPA proposed
new regulations to reduce nitrogen oxide emissions substantially over the next
eight years. This proposal would affect 22 states including three in which the
Company has cement plants: Indiana, Illinois and Missouri. Depending on state
implementation, this emissions reduction could adversely affect the cement
industry in these states.

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<PAGE> 8

disposal of CKD that will be based largely on selected components of the
existing RCRA hazardous waste regulatory program, tailored to address the
specific regulatory concerns posed by CKD. The EPA regulatory determination
further provides that new CKD regulations will be designed both to be protective
of the environment and to minimize the burden on cement manufacturers. While it
is not possible to predict at this time precisely what new regulatory controls
on the management, handling and disposal of CKD or what increased costs (or
range of costs) would be incurred by the Company to comply with these
requirements, the EPA announced in 1996 that regulations will be promulgated
through a rulemaking scheduled to be completed shortly, and that, thereafter,
these rules will be implemented over a three-year period. The types of controls
being considered by the EPA include fugitive dust emission controls,
restrictions for landfills located in sensitive areas, groundwater monitoring,
standards for liners and caps, metals limits and corrective action for currently
active units.

In 1995, the State of Indiana made a determination that the CKD stored at
the Company's Greencastle plant is a Type I waste and requested that the Company
apply for a formal permit for an on-site landfill for the CKD. The Company
understands that similar notices were sent to other cement manufacturers in the
State of Indiana. The Company is protesting this determination through legal
channels and has received a stay to allow it to demonstrate that current
management practices pose no threat to the environment. The Company believes
that the State's determination ultimately will be reversed or the Company will
receive the needed permit or other adequate relief, such as an agreed order
requiring certain additional waste management procedures that are less stringent
than those generally required for Type I wastes. If the Company is not
successful in this regard, however, like other Indiana cement producers, the
Greencastle plant could incur substantially increased operating and capital
costs.

The Cape Girardeau, Missouri and Greencastle, Indiana plants, which are the
Company's two cement manufacturing facilities using HWF as a cost-saving energy
source, are subject to strict federal, state and local requirements governing
hazardous waste treatment, storage and disposal facilities, including those
contained in the federal Boiler and Industrial Furnace Regulations promulgated
under RCRA (the "BIF Rules"). These facilities qualified for and operate under
interim status pursuant to RCRA and the BIF Rules. While Lone Star believes that
it is currently in compliance with the extensive and complex technical
requirements of the BIF Rules, there can be no assurances that the Company will
be able to maintain compliance with the BIF Rules or that changes to such rules
or their interpretation by the relevant agencies or courts might not make it
more difficult or cost-prohibitive to continue to burn HWF.

The Company is currently engaged in the process of securing the permit
required under RCRA and the BIF Rules for the Cape Girardeau plant. The Company
anticipates that the Greencastle plant also will go through this permitting
process or a three-year recertification of its existing interim status in 1998.
These permits are a requirement to enable Lone Star to continue the use of HWF
at those facilities. The permitting process is lengthy and complex, involving
the submission of extensive technical data. There can be no assurances that the
Company will be successful in securing a final RCRA permit for either or both of
its HWF facilities. In addition, if received, the permits could contain terms
and conditions with which the Company cannot comply or could require the Company
to install and operate costly control technology equipment.

The federal Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA" or "Superfund"), as well as many comparable state
statutes, creates a joint and several liability scheme for the investigation and
remediation of facilities where releases of hazardous substances are found to
have occurred. Liability may be imposed upon current owners and operators of the
facility, upon owners and operators of the facility at the time of the release
and upon generators and transporters of hazardous substances released at the
facility. While, as noted above, wastes produced by the Company generally are
not classified as hazardous wastes, many of the raw materials, by-products and
wastes currently and previously produced, used or disposed of by the Company or
its predecessors contain chemical elements or components that have been
designated as hazardous substances or which otherwise may cause environmental
contamination. Hazardous substances are or have been used or produced by the
Company in connection with its cement manufacturing operations (e.g. grinding
compounds, refractory bricks), quarrying operations (e.g. blasting materials),
equipment operation and maintenance (e.g. lubricants, solvents, grinding aids,
cleaning aids, used oils), and hazardous waste fuel burning operations. Past
operations of the Company have resulted in releases of hazardous substances at
sites currently or formerly owned by the Company and certain of its subsidiaries
or where waste materials generated by the Company have been disposed. CKD and
other materials were placed in depleted quarries and other locations for many
years. The Company has been named by the EPA as a potentially responsible party
for the investigation and remediation of several Superfund sites. Available
factual information indicates that the Company's disposal of waste at these

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<PAGE> 9

Superfund sites (other than sites that have been remediated or as to which the
Company has entered into settlement agreements with the EPA) was small or
non-existent, and the Company may have certain defenses arising out of its
reorganization. The Company is also reviewing certain of its inactive properties
to determine if any remedial action may be required at these sites.

The Company's operations are also subject to federal and state laws and
regulations designed to protect worker health and safety. Worker protection at
the Company's cement manufacturing facilities is governed by the federal Mine
Safety and Health Act ("MSHA") and at other Company operations is governed by
the federal Occupational Safety and Health Act ("OSHA").

EMPLOYEES

As of December 31, 1997, the Company had approximately 1,060 employees, of
which approximately 670 are hourly paid and located at the Company's various
operations. Except at certain distribution terminals and the New Orleans
facility, all hourly employees are represented by labor unions.

During 1996 and 1997, multi-year collective bargaining agreements covering
substantially all hourly paid employees at the Company's five portland cement
plants and at certain related distribution terminals were successfully
renegotiated. There have been no labor disruptions at any of the Company's
facilities, and the Company believes that its relationship with its employees
generally has been good. Multi-year collective bargaining agreements with unions
representing approximately 15 hourly paid employees at the Company's Cape
Girardeau alternate fuels facility and approximately 75 hourly drivers and
mechanics at its Memphis ready-mixed concrete operations expire during the first
quarter of 1998. The Company does not anticipate any disruption of its
operations in connection with the renegotiating of these contracts.

BANKRUPTCY REORGANIZATION PROCEEDINGS

In December 1990, Lone Star Industries, Inc. and certain of its
subsidiaries commenced proceedings under Chapter 11 of the Federal Bankruptcy
Code. The Chapter 11 proceedings were precipitated by a variety of factors
including generally depressed economic and business conditions, increasingly
restricted sources of financing, potential litigation exposure and potential
liabilities relating to environmental matters, retiree benefits and pension
obligations. On April 14, 1994, the Company emerged from these proceedings and
was reorganized around its core domestic operations, implementing a
comprehensive organizational and financial restructuring through which it closed
certain facilities, reduced management, strategically disposed of assets,
rejected or modified agreements, settled litigations, implemented settlements
relating to certain retiree medical and life insurance benefits, pension and
financing obligations, and improved operating procedures at its ongoing
operations.

ITEM 2. PROPERTIES.

Lone Star's main operations are conducted at its plants and distribution
terminals described in Item 1 above. Lone Star owns its five portland cement
plants, its slag grinding and storage facility and a majority of the
distribution terminals supporting these plants. With respect to those
distribution terminals not owned, Lone Star holds a land lease for the
underlying real property and owns the facilities located on such property. There
is one additional distribution terminal that is under construction and one that
is leased to a third party. The ready-mixed concrete plants are located on owned
land or sites held under leases for varying terms. No difficulty is anticipated
in renewing leases as they expire or finding satisfactory alternative sites. The
Company leases executive offices in Stamford, Connecticut and owns or leases
certain sales and other offices in various locations within its market areas in
the United States.

ITEM 3. LEGAL PROCEEDINGS.

From time to time the Company is named as a defendant in lawsuits asserting
product liability for which the Company maintains insurance coverage. In this
regard, the Company is one of many defendants, including several cement
manufacturers, named in two product liability lawsuits in southern Texas that
allege that cement is an unreasonably dangerous product that has injured a large
number of plaintiffs. The Company believes this type of litigation is totally
without merit and is contesting the lawsuits vigorously. The Company has also
been named in a lawsuit asserting that it has successor liability for certain
defunct subsidiaries which allegedly manufactured faulty prestressed "double
tees" resulting in property damage to a retail store (and consequent loss of
business) in south Florida during Hurricane Andrew
7
<PAGE> 10

in 1992. In late 1995, an office building in Boston, Massachusetts, constructed
in 1983 using concrete pilings produced by San-Vel Concrete Corporation, an
inactive Lone Star subsidiary ("San-Vel"), was demolished by order of the City
of Boston based upon an engineering report that the pilings were unreliable. The
owner of this demolished building brought suit against San-Vel and the Company
alleging, among other things, that San-Vel was negligent in producing, and that
it breached representations relating to, the pilings. At the request of the City
of Boston, San-Vel has provided a list of the approximate twenty-five other
buildings built in that City between 1980 and 1990 using San-Vel pilings. The
City has reportedly inspected these buildings visually, without noting any
apparent piling failure. Certain engineering studies also have been conducted,
and those limited results that have been made available to the Company do not
indicate any additional failures. The Company believes that San-Vel used cement
produced by Lone Star at one of its formerly owned cement plants to mix the
concrete from which pilings in certain of these buildings (including the
demolished building) were produced. There has been no indication that Lone
Star's production of this cement was defective. The Company is contesting this
lawsuit vigorously, and believes that it has good defenses to the lawsuit. All
of the foregoing matters are being defended by the Company's insurers. No
assurances as to their ultimate outcome can be given.

For information concerning certain environmental matters involving the
Company, see "Business -- Environmental Regulation".

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

Not applicable.

EXECUTIVE OFFICERS OF REGISTRANT

The following table sets forth certain information regarding the executive
officers of the Company.

<TABLE>
<CAPTION>
NAME AGE OFFICE AND YEAR IN WHICH INDIVIDUAL FIRST BECAME AN EXECUTIVE OFFICER
- ---- --- ---------------------------------------------------------------------
<S> <C> <C>
David W. Wallace..................... 74 Chairman of the Board (1991)
William M. Troutman.................. 57 President and Chief Executive Officer (1983)
Roger J. Campbell.................... 61 Vice President -- Cement Operations (1986)
William J. Caso...................... 53 Vice President -- Taxes and Insurance (1994)
Thomas S. Hoelle..................... 46 Vice President -- General Manager, Slag Operations (1994)
Gerald F. Hyde, Jr. ................. 55 Vice President -- Personnel and Labor Relations (1983)
James W. Langham..................... 38 Vice President, General Counsel and Secretary (1995)
Harry M. Philip...................... 49 Vice President -- Cement Manufacturing (1994)
Michael W. Puckett................... 53 Vice President -- Cement Sales and Concrete Operations (1985)
William E. Roberts................... 58 Vice President, Chief Financial Officer, Controller and Treasurer
(1988)
</TABLE>

All of the executive officers' terms of office continue until the next
annual meeting of the Company's stockholders and until their successors have
been elected and qualified. All of the executive officers have been employed by
the Company as an officer or in an executive capacity for more than five years,
except for Mr. Langham, who for more than five years prior to joining the
Company was an attorney in New York City.

8
<PAGE> 11

PART II

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

The Company's common stock and related purchase rights and its warrants are
listed on the New York Stock Exchange ("NYSE"). The following table sets forth
the high and low sales prices for the common stock and warrants in composite
transactions as reported on the NYSE as well as dividend information relating to
the common stock.

<TABLE>
<CAPTION>
COMMON STOCK WARRANTS
------------------------ -----------
HIGH LOW DIVIDENDS HIGH LOW
---- --- --------- ---- ---
<S> <C> <C> <C> <C> <C>
1996
First Quarter...................... $30 1/2 $24 1/4 $0.05 $14 3/8 $ 8 3/4
Second Quarter..................... 37 1/4 29 1/4 0.05 20 13 1/4
Third Quarter...................... 34 28 3/4 0.05 17 3/8 14
Fourth Quarter..................... 38 1/2 31 7/8 0.05 21 3/8 16

1997
First Quarter...................... $45 1/4 $34 7/8 $0.05 $28 5/8 $18 1/4
Second Quarter..................... 45 9/16 37 1/4 0.05 28 21
Third Quarter...................... 54 1/4 45 1/4 0.05 36 1/2 28 1/2
Fourth Quarter..................... 61 1/4 48 7/8 0.05 38 1/8 31 3/4
</TABLE>

On March 2, 1998, the last reported sale price of the common stock and
warrants was $60 11/16 per share and $42 1/2 per warrant. As of March 2, 1998,
the Company had approximately 2,247 holders of record of common stock and 3,180
holders of record of warrants.

The Company's financing agreements contain certain restrictive covenants
which, among other things, could have the effect of limiting the payment of
dividends and the repurchase of common stock and warrants. Approximately $101.3
million is currently available for such payments under the most restrictive of
such covenants.

9
<PAGE> 12

ITEM 6. SELECTED FINANCIAL DATA.

The following selected financial data are derived from the Consolidated
Financial Statements of the Company. The data should be read in conjunction with
the Consolidated Financial Statements, related Notes and other financial
information included herein:

<TABLE>
<CAPTION>
SUCCESSOR COMPANY PREDECESSOR COMPANY
--------------------------------------------- ----------------------------
FOR THE NINE FOR THE
FOR THE YEARS ENDED MONTHS THREE MONTHS FOR THE
DECEMBER 31, ENDED ENDED YEAR ENDED
------------------------------ DECEMBER 31, MARCH 31, DECEMBER 31,
1997 1996 1995 1994 1994 1993
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) ---- ---- ---- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............................ $357,565 $367,673 $323,008 $261,645 $ 33,709 $240,071
Net income (loss).................... $ 65,413 $ 54,160 $ 35,762 $ 29,333 $(23,118)(3) $(36,040)
- ----------------------------------------------------------------------------------------------------------------------

PER COMMON SHARE(1):
Basic earnings (loss) per share...... $ 5.98 $ 4.80 $ 2.98 $ 2.44 n/m(3) $ (2.47)
Diluted earnings (loss) per share.... $ 4.87 $ 4.09 $ 2.81 $ 2.44 n/m(3) $ (2.47)
- ----------------------------------------------------------------------------------------------------------------------
Shares outstanding at December 31.... 10,726 10,713 11,477 12,000 n/m 16,645
- ----------------------------------------------------------------------------------------------------------------------
Cash dividends per common share...... $ 0.20 $ 0.20 $ 0.15 -- -- --
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
SUCCESSOR COMPANY PREDECESSOR
------------------------------------------------------ COMPANY
DECEMBER 31, ------------
----------------------------------------- MARCH 31, DECEMBER 31,
1997 1996 1995 1994 1994 1993
---- ---- ---- ---- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL POSITION AT END OF PERIOD:
Total assets......................... $598,977 $562,151 $477,465 $553,320 $579,411 $924,885
Long-term debt:
Senior notes(2).................... $ 50,000 $ 50,000 $ 78,000 $ 78,000 $ 78,000 --
Asset proceeds notes............... -- -- $ 4,399 $ 87,000 $112,000 --
Production payment................... -- -- -- $ 19,966 $ 20,963 $ 2,000
Liabilities subject to Chapter 11
proceedings........................ -- -- -- -- -- $627,938
Redeemable preferred stock........... -- -- -- -- -- $ 37,500
Common shareholders' equity.......... $333,634 $264,282 $159,740 $122,463 $ 93,313 $ 12,348
</TABLE>

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

(1) Earnings per share for prior years have been restated in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(See Note 1 of Notes to Financial Statements).

(2) See Note 9 of Notes to Financial Statements.

(3) The Company adopted "fresh-start" reporting as of March 31, 1994, in
accordance with AICPA Statement of Position No. 90-7, "Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code". Accordingly, the
Company's consolidated financial statements for periods prior to March 31,
1994 are not comparable to consolidated financial statements presented on or
subsequent to March 31, 1994. A black line has been drawn to distinguish the
pre-reorganization and post-reorganization company. Earnings per share for
the three months ended March 31, 1994 are not meaningful and prior period
per share amounts are not comparable to the successor company per share
amounts due to reorganization and revaluation entries and the issuance of 12
million shares of new common stock.

10
<PAGE> 13

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

FINANCIAL CONDITION

The Company believes that cash and marketable securities on hand of $154.1
million and funds generated by operations will be adequate to cover current
working capital and capital expenditure needs.

In October 1997, the Company sold its New York construction aggregates
operations for $43.2 million, which approximated book value.

In March 1997, the Company sold its two ready-mixed operations in central
Illinois for $10.5 million, which approximated book value.

In March 1997, the Company redeemed $28.0 million of its $78.0 million of
10% senior notes. The notes were paid from cash on hand. In addition, the
Company entered into a long-term private placement agreement for $50.0 million
of 7.31% senior notes due 2007. In April 1997, the Company redeemed the balance
of the 10% senior notes at par plus accrued interest of approximately $1.1
million.

In March 1997, the Company canceled its $35.0 million secured revolving
credit agreement and during the second quarter, entered into a new $100.0
million unsecured revolving credit facility which will allow the Company to
borrow funds at lower interest rates and increase the Company's ability to
repurchase common stock and warrants.

The Company's financing agreement and the revolving credit facility contain
certain restrictive covenants which, among other things, could have the effect
of limiting the payment of dividends and the repurchase of common stock and
warrants. Approximately $101.3 million is currently available for such payments
under the most restrictive of such covenants.

The Board of Directors has authorized the Company to purchase up to $50.0
million of the Company's common stock and warrants in open market or privately
negotiated transactions of which the Company repurchased $14.1 million of common
stock during 1997.

Analysis of Cash Flows and Working Capital

Cash flows from operating activities of $107.4 million for the year ended
December 31, 1997 primarily reflect income from operations and changes in
working capital. The utilization in 1997 of net operating loss carryforwards and
other deferred tax assets reduced cash taxes otherwise payable by $25.1 million.
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $115.0 million and investment tax credit carryforwards and
alternative minimum tax credits of $18.8 million, which are expected to reduce
future cash taxes by an additional $59.0 million over time.

During the year ended December 31, 1997, investing activities provided
$15.0 million, primarily representing $57.0 million received for the sales of
the Company's central Illinois ready-mixed concrete operations, its New York
construction aggregates operations and a surplus parcel of real estate in
Massachusetts. These cash proceeds were partially offset by capital expenditures
of $42.0 million.

Net cash outflows from financing activities of $39.6 million for the year
ended December 31, 1997 primarily reflect the redemption of $78.0 million of 10%
senior notes, dividends paid and the repurchase of 283,800 shares of common
stock for $14.1 million. These cash outflows were partly offset by proceeds from
the private placement of $50.0 million of 7.31% long-term senior notes as well
as the proceeds of $4.6 million received from the exercise of stock options.

Working capital on December 31, 1997 was $169.6 million as compared to
$77.0 million on December 31, 1996. Current assets increased $67.8 million
primarily due to higher short-term investments offset by lower accounts and
notes receivable and inventory balances. Current liabilities decreased $24.9
million primarily due to the redemption of $28.0 million of the 10% senior notes
during the first quarter of 1997, partly offset by an increase in accrued
expenses.

The $9.7 million decrease in the Company's long-term deferred tax asset is
primarily due to the utilization of a portion of the tax assets in 1997, partly
offset by the elimination of the remaining valuation allowance. Investments in
joint ventures increased $0.8 million as the Company's share of equity earnings
exceeded cash distributions paid from Kosmos

11
<PAGE> 14

Cement Company. Net property, plant and equipment decreased $23.7 million
reflecting depreciation and the sale of the Company's ready-mixed concrete
operations in Illinois and its construction aggregate operations in New York,
partly offset by capital expenditures. The long-term portion of the liability
related to postretirement benefits other than pensions decreased $8.5 million,
primarily due to the sale of the Company's construction aggregates operations.

During 1997, the Company paid four $0.05 per share quarterly dividends for
a total of $2.2 million.

Capital Expenditures

Capital expenditures of $42.0 million for 1997 were primarily for major
repairs, replacements and improvements of existing facilities, including the
completion of a modern clinker storage facility at the Cape Girardeau, Missouri
plant and the beginning of work on the expansion of this plant's production
capacity by 100,000 tons. Other projects included the expansion of the New
Orleans, Louisiana slag cement facility and the Memphis, Tennessee cement
terminal and the construction of a cement terminal in Oklahoma City, Oklahoma.
Other significant expenditures included the purchase of land for the
construction of a slag cement terminal in Atlanta, Georgia and the purchase or
refurbishment of equipment such as cranes, quarry drills, compressors, kiln
shells, a primary crusher, various computer equipment and mobile equipment such
as rail hopper cars, bulldozers and quarry haul trucks.

In an effort to increase production, improve operating efficiencies and
further reduce costs, the Company plans to invest approximately $61 million in
capital projects in 1998. These projects include a 100,000-ton expansion at the
Cape Girardeau, Missouri cement plant and several projects at the New Orleans
facility. The projects at the New Orleans facility will double the size of the
existing distribution system by adding more than 50,000 tons of new storage
capacity and installing a state-of-the-art ship and barge unloading system. In
addition, the Company is enlarging its Memphis, Tennessee distribution terminal
for slag cement and building new slag cement terminals in Atlanta, Georgia and
Northern Florida. The Company plans to fund its 1998 capital expenditures from
cash on hand in addition to cash generated from operations.

Other Information

The Company is subject to extensive, stringent and complex federal, state
and local laws, regulations and ordinances pertaining to the quality and the
protection of the environment and human health and safety, requiring the Company
to devote substantial time and resources in an effort to maintain continued
compliance. Many of the laws and regulations apply to the Company's former
activities, properties and facilities as well as its current operations. There
can be no assurances that judicial or administrative proceedings, seeking
penalties or injuctive relief, will not be brought against the Company for
alleged non-compliance with applicable environmental laws and regulations
relating to matters as to which the Company is currently unaware. For instance,
if releases of hazardous substances are discovered to have occurred at
facilities currently or previously owned or operated by the Company, or at
facilities to which the Company has sent waste materials, the Company may be
subject to liability for the investigation and remediation of such sites. In
addition, changes to such regulations or the enactment of new regulations in the
future could require the Company to undertake capital improvement projects or to
cease or curtail certain operations or could otherwise substantially increase
the capital, operating and other costs associated with compliance (See Note 22).

The Company believes that it has adequately provided for costs related to
its ongoing obligations with respect to known environmental liabilities.
Expenditures for environmental liabilities during 1997 did not have a material
effect on the financial condition or cash flows of the Company.

The Company is presently conducting a review of its computer systems to
identify those which could be affected by "Year 2000" problems. Based upon the
preliminary results of this review, the Company does not have any "Year 2000"
problems associated with its financial systems and expenses related to
correcting any "Year 2000" problems associated with computer systems at the
plants are not expected to be material. Expenses incurred to date to correct
"Year 2000" problems were not material.

During 1997 and 1996, collective bargaining agreements covering
substantially all of the Company's five cement plants and certain of its
distribution terminals were successfully renegotiated. The agreements covering
hourly employees at one alternate fuel plant and the Company's ready-mixed
concrete division are scheduled for renegotiation in 1998. The

12
<PAGE> 15

Company does not anticipate any disruption of its operations in connection with
the renegotiation of these agreements, however, there can be no assurances in
this regard.

Forward-Looking Statements

This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this annual report and Form 10-K
contain forward-looking statements within the meaning of Section 27A of the
Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Many of these forward-looking statements are based on current
expectations, estimates and projections concerning the general state of the
economy and the industry and market conditions in certain geographic locations
in which the Company operates. Words such as "expects", "anticipates",
"intends", "plans", "believes", "estimates" and variations of such words and
similar expressions are intended to identify such forward-looking statements.
These statements are not guarantees of future performance and involve certain
risks, uncertainties and assumptions which are difficult to predict. Therefore,
actual results and outcomes may differ materially from what is expressed or
forecasted in such forward-looking statements. The Company undertakes no
obligation to update publicly any forward-looking statements as a result of new
information, future events or other factors.

The Company's business is cyclical and seasonal, the effects of which
cannot be accurately predicted (See "Business -- Construction Industry
Conditions"). Risks and uncertainties include changes in general economic
conditions (such as changes in interest rates), changes in economic conditions
specific to any one or more of the Company's markets (such as the strength of
local real estate markets and the availability of public funds for
construction), adverse weather, unexpected operational difficulties, changes in
governmental and public policy including increased environmental regulation, the
outcome of pending and future litigation, the successful negotiation of labor
contracts and the continued availability of financing in the amounts, at the
times, and on the terms required to support the Company's future business. Other
risks and uncertainties could also affect the outcome of the forward-looking
statements.

RESULTS OF OPERATIONS

1997 COMPARED TO 1996

Net Sales

Consolidated net sales of $357.6 million during 1997 were $10.1 million
lower than the prior-year results. The decrease in net sales primarily reflects
the sales of the Company's central Illinois ready-mixed concrete operations and
its New York construction aggregates operations during 1997. Total cement sales
were higher due to higher cement prices combined with higher cement shipments.
In each of the years 1997 and 1996, the Company sold the approximate rated
capacity of its cement plants.

Cement and ongoing ready-mixed concrete operations reported sales of $317.2
million for 1997 which were $19.4 million higher than 1996. This increase is due
to 5% higher average net realized cement selling prices in 1997 combined with a
2% increase in cement shipments during the year. In 1997, the Company shipped
more than 4.2 million tons of cement. The increase in shipments is attributable
to continued strong demand for cement in the Company's major markets. These
results exclude sales of $1.9 million and $21.6 million for 1997 and 1996,
respectively, related to the Company's central Illinois ready-mixed concrete
operations which were sold in March 1997.

The 1997 results include sales from the construction aggregates operations
of $38.5 million, $9.8 million lower than in 1996. The construction aggregates
operations in New York were sold in October 1997.

Net sales of cement, construction aggregates and ready-mixed concrete and
other products were 83%, 11% and 6%, respectively, of total sales in 1997.

Gross Profit

Gross profit from the ongoing cement and ready-mixed concrete operations of
$111.4 million for 1997 was $14.1 million higher than 1996. The increase in
gross profit reflects higher average net realized cement and ready-mix selling
prices, greater cement production, higher overall shipments for the year and
lower cement per unit production costs. These results exclude a loss at the
gross profit level of $0.3 million for 1997 and gross profit of $3.3 million for
1996 related to the Company's central Illinois ready-mixed concrete operations
which were sold during the first quarter of 1997.

13
<PAGE> 16

Construction aggregates operations, which were sold in October 1997, had a
gross profit of $4.0 million for the year ended December 31, 1997. Results from
these operations for 1996 included gross profit of $6.4 million.

Included in the calculation of gross profit are sales less cost of sales
including depreciation related to cost of sales (which excludes depreciation
related to depreciation on office equipment, furniture and fixtures which are
not related to the cost of sales).

Joint Ventures

Pre-tax income from joint ventures of $8.6 million during 1997 reflects the
results of the Kosmos Cement Company, a partnership in which the Company has a
25% interest. The results for 1997 were $1.2 million higher than the prior year
reflecting higher net realized selling prices and higher shipments.

Other Income

Other income of $7.9 million in 1997 increased $4.9 million from 1996,
primarily reflecting a gain of $3.1 million on the sale of a surplus parcel of
real estate and higher interest income earned on higher short-term investment
balances.

Selling, General and Administrative Expenses

Selling, general and administrative expenses of $28.9 million during 1997
approximated the prior-year expense, reflecting lower pension expense and lower
expense related to the Company's central Illinois ready-mixed concrete
operations which were sold in March 1997 and its New York construction
aggregates operations which were sold in October 1997. These savings were offset
by higher selling and administrative expenses related to the Company's cement
operations. Selling, general and administrative expenses for 1997 include $4.3
million of other postretirement benefit costs related to the Company's presently
retired employees.

Interest Expense

Interest expense of $3.6 million in 1997 represents a decrease of $3.0
million from the prior-year expense. Capitalized interest was $1.4 million in
1997 and $1.3 million in 1996. The reduction in interest expense reflects the
Company's redemption of $28.0 million of its 10% senior notes in March 1997 and
the redemption of the remaining $50.0 million through a 7.31% private placement
agreement in April 1997.

Income Taxes

The income tax expense of $33.3 million during 1997, an increase of $5.7
million from the prior-year expense, primarily reflects higher pre-tax earnings
in 1997.

Net Income

Net income of $65.4 million during 1997 was $11.3 million higher than the
prior-year results. On a per share basis, basic and diluted earnings for 1997
were $5.98 and $4.87, respectively, compared to $4.80 and $4.09, respectively,
for 1996. This improvement is primarily due to higher average selling prices and
increased shipments of cement. Also contributing to the favorable increase in
net income for 1997 over the prior-year results were a gain on the sale of
surplus real estate, higher interest income reflecting higher investment
balances, higher joint venture income and lower interest expense. These
favorable results were partly offset by increased income tax expense due to
higher pre-tax earnings.

1996 COMPARED TO 1995

Net Sales

Consolidated net sales of $367.7 million during 1996 were $44.7 million
higher than the prior-year results. The increase in net sales primarily reflects
cement price increases implemented in April 1996 and during 1995, combined with
higher cement shipments. In each of the years 1996 and 1995, the Company sold
approximately the rated capacity of its cement plants.

14
<PAGE> 17

Cement and ongoing ready-mixed concrete operations reported sales of $297.8
million for 1996 which were $39.6 million higher than 1995. This increase is due
to 6% higher average net realized cement selling prices in 1996 combined with a
9% increase in cement shipments during the year. The higher shipments are due to
strong demand for cement at all locations. These results exclude sales of $21.6
million and $16.4 million for 1996 and 1995, respectively, related to the
Company's central Illinois ready-mixed concrete operations which were sold in
March 1997.

Sales of construction aggregates of $48.2 million during 1996 were
comparable to the 1995 results. This is primarily attributable to higher average
net realized selling prices, partly offset by a 7% decrease in overall
construction aggregate shipments. The reduction in sales reflects the sale of
the Nova Scotia, Canada quarry in 1995, partly offset by increased shipments to
the New York metropolitan area reflecting improved construction activity. In
1995, shipments from the New York Trap Rock operations were adversely affected
by the temporary closure of a customer's asphalt plant (for rebuilding
purposes), a sluggish concrete stone market and the decision not to compete on
certain low-price jobs.

The assets of the Nova Scotia quarry were sold in October 1995 for net
proceeds including working capital of about $11.4 million, which approximated
book value. This operation contributed sales of $8.1 million and an operating
loss of $0.4 million to the 1995 results.

Net sales of cement, construction aggregates and ready-mixed concrete and
other products were 75%, 13% and 12%, respectively, of total sales in 1996.

Gross Profit

Gross profit from the cement and ongoing ready-mixed concrete operations of
$97.3 million for 1996 was $20.3 million higher than 1995. Gross profit was
higher than the previous year at every cement plant. The increase in gross
profit reflects higher average net realized cement and ready-mix selling prices
and higher overall shipments. These results exclude gross profit of $3.3 million
and $1.5 million for 1996 and 1995, respectively, related to the Company's
central Illinois ready-mixed concrete operations which were sold in March 1997.

Gross profit from construction aggregates of $6.4 million during 1996 was
$2.9 million above the prior year. The 1996 results primarily reflect higher
average selling prices and shipments and lower production costs at the New York
construction aggregates operations.

Joint Ventures

Pre-tax income from joint ventures of $7.4 million during 1996 reflects the
results of the Kosmos Cement Company, a partnership in which the Company has a
25% interest. The results for 1996 were $0.7 million higher than the prior year
reflecting higher net realized selling prices and higher shipments.

Other Income

Other income of $3.0 million in 1996 decreased $1.0 million from 1995,
reflecting lower rental income resulting from sales of assets which had been
leased to third parties and lower interest earned on short-term investments.

Selling, General and Administrative Expenses

Selling, general and administrative expenses of $28.5 million during 1996
represent a decrease of $1.2 million over the prior-year expense. The savings in
selling, general and administrative expenses primarily reflect lower other
postretirement benefit expense related to current retirees. The lower other
postretirement benefit expense reflects the favorable experience for retiree
medical claims. Selling, general and administrative expenses for 1996 include
$4.6 million of other postretirement benefit costs related to the Company's
presently retired employees.

Interest Expense

Interest expense of $6.6 million in 1996 represents a decrease of $2.5
million from the prior-year expense. Capitalized interest was $1.3 million in
1996 and $0.3 million in 1995. The decrease in interest expense is primarily
attributable to the termination of the Company's production payment liability
during 1995 and higher capitalized interest in 1996.

15
<PAGE> 18

Income Taxes

The income tax expense of $27.6 million during 1996, an increase of $10.0
million from the prior-year expense, primarily reflects higher pre-tax earnings
in 1996.

Net Income

Net income of $54.2 million during 1996 was $18.4 million higher than the
prior-year results. On a per share basis, basic and diluted earnings for 1996
were $4.80 and $4.09, respectively, compared to $2.98 and $2.81, respectively,
for 1995. This improvement is primarily due to improved results in all product
lines. Also contributing to the favorable increase in net income for 1996 over
the prior-year results were lower selling, general and administrative expenses
and lower interest expense. The favorable results were partly offset by
increased income tax expense due to higher pre-tax earnings.

16
<PAGE> 19

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

LONE STAR INDUSTRIES, INC.

INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... 18

Consolidated Financial Statements:
Statements of Operations for the Years Ended December
31, 1997, 1996 and 1995............................... 19
Balance Sheets -- December 31, 1997 and 1996........... 20
Statements of Changes in Common Shareholders' Equity
for the Years Ended December 31, 1997, 1996 and
1995.................................................. 21
Statements of Cash Flows for the Years Ended December
31, 1997, 1996 and 1995............................... 22
Notes to Financial Statements.......................... 23

Schedule:
II Valuation and Qualifying Accounts................... 44

Consent of Independent Accountants.......................... 45
</TABLE>

The foregoing supporting schedule should be read in conjunction with the
consolidated financial statements and notes thereto in this 1997 annual report
on Form 10-K.

The presentation of individual condensed financial information of the
Company is omitted because the restricted net assets of the consolidated
subsidiaries do not exceed twenty-five percent of total consolidated net assets
at December 31, 1997 and 1996.

Separate financial statements for the Company's fifty percent or less owned
affiliate are omitted because such subsidiary individually does not constitute a
significant subsidiary at December 31, 1997 and 1996.

Schedules other than those listed above are omitted because the information
required is not applicable or is included in the financial statements or notes
thereto. Columns omitted from schedules filed are omitted because the
information is not applicable.

17
<PAGE> 20

REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
LONE STAR INDUSTRIES, INC.

We have audited the consolidated balance sheets of Lone Star Industries,
Inc. and Subsidiaries (the "Company") as of December 31, 1997 and 1996, and the
related consolidated statements of operations, changes in common shareholders'
equity and cash flows for the years ended December 31, 1997, 1996 and 1995. We
have also audited the Financial Statement Schedule II included in this annual
report on Form 10-K. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Lone Star Industries, Inc. and Subsidiaries as of December 31, 1997 and 1996,
and the consolidated results of their operations and their cash flows for the
years ended December 31, 1997, 1996 and 1995, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.

Coopers & Lybrand L.L.P.

Stamford, Connecticut
January 28, 1998

18
<PAGE> 21

LONE STAR INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) ------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Net sales................................................. $357,565 $367,673 $323,008
Joint venture income...................................... 8,571 7,378 6,728
Other income, net......................................... 7,923 3,007 4,040
-------- -------- --------
374,059 378,058 333,776
-------- -------- --------
Deductions from revenues:
Cost of sales............................................. 219,290 237,114 217,942
Selling, general and administrative expenses.............. 28,857 28,508 29,734
Depreciation and depletion................................ 23,591 24,060 23,628
Interest expense.......................................... 3,585 6,606 9,096
-------- -------- --------
275,323 296,288 280,400
-------- -------- --------
Income before income taxes.................................. 98,736 81,770 53,376
Provision for income taxes.................................. (33,323) (27,610) (17,614)
-------- -------- --------
Net income applicable to common stock....................... $ 65,413 $ 54,160 $ 35,762
======== ======== ========
Weighted average common shares outstanding:
Basic..................................................... 10,941 11,290 11,990
======== ======== ========
Diluted................................................... 13,429 13,246 12,742
======== ======== ========
Earnings per common share:
Basic..................................................... $ 5.98 $ 4.80 $ 2.98
======== ======== ========
Diluted................................................... $ 4.87 $ 4.09 $ 2.81
======== ======== ========
</TABLE>

The accompanying Notes to Financial Statements are an integral part of the
Financial Statements.

19
<PAGE> 22

LONE STAR INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
(DOLLARS IN THOUSANDS) ---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash, including cash equivalents of $152,775 in 1997 and
$69,768 in 1996........................................... $154,080 $ 71,215
Accounts and notes receivable, net.......................... 28,217 33,336
Inventories................................................. 43,103 53,869
Deferred tax asset.......................................... 3,825 3,611
Other current assets........................................ 3,751 3,183
-------- --------
TOTAL CURRENT ASSETS.............................. 232,976 165,214
Joint ventures.............................................. 20,326 19,505
Property, plant and equipment, net.......................... 299,255 322,982
Deferred tax asset.......................................... 37,661 47,365
Other assets and deferred charges........................... 8,759 7,085
-------- --------
TOTAL ASSETS...................................... $598,977 $562,151
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................................ $ 13,400 $ 12,562
Accrued liabilities......................................... 46,417 44,238
Senior notes payable........................................ -- 28,000
Other current liabilities................................... 3,565 3,436
-------- --------
TOTAL CURRENT LIABILITIES......................... 63,382 88,236
Senior notes payable........................................ 50,000 50,000
Postretirement benefits other than pensions................. 123,728 132,219
Other liabilities........................................... 28,233 27,414
Contingencies (Notes 22 and 23)
-------- --------
TOTAL LIABILITIES................................. 265,343 297,869
-------- --------
Common stock, $1 par value. Authorized: 50,000,000 shares
Shares issued: 1997 -- 12,091,866; 1996 -- 12,086,510..... 12,092 12,087
Warrants to purchase common stock........................... 15,554 15,574
Additional paid-in capital.................................. 174,915 163,664
Retained earnings........................................... 178,444 115,228
Treasury stock, at cost..................................... (47,371) (42,271)
-------- --------
TOTAL SHAREHOLDERS' EQUITY........................ 333,634 264,282
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $598,977 $562,151
======== ========
</TABLE>

The accompanying Notes to Financial Statements are an integral part of the
Financial Statements.

20
<PAGE> 23

LONE STAR INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF
CHANGES IN COMMON SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
(IN THOUSANDS) ------------ ------------ ------------
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning of period........................... $ 12,087 $ 12,081 $ 12,000
Exercise of warrants to purchase common stock.......... 5 6 4
Exercise of stock options.............................. -- -- 77
-------- -------- --------
Balance at end of period................................. 12,092 12,087 12,081
-------- -------- --------
WARRANTS TO PURCHASE COMMON STOCK
Balance at beginning of period........................... 15,574 15,597 15,613
Exercise of warrants to purchase common stock.......... (20) (23) (16)
-------- -------- --------
Balance at end of period................................. 15,554 15,574 15,597
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period........................... 163,664 82,709 65,700
Exercise of warrants to purchase common stock.......... 116 122 90
Sales of treasury stock................................ 13 3 3
Exercise of stock options, net of tax benefit.......... (1,771) (1,059) 1,100
Reduction of tax valuation allowance................... 12,893 81,889 15,816
-------- -------- --------
Balance at end of period................................. 174,915 163,664 82,709
-------- -------- --------
RETAINED EARNINGS
Balance at beginning of period........................... 115,228 63,315 29,333
Net income............................................. 65,413 54,160 35,762
Dividends.............................................. (2,197) (2,247) (1,780)
-------- -------- --------
Balance at end of period................................. 178,444 115,228 63,315
-------- -------- --------
CUMULATIVE TRANSLATION ADJUSTMENT
Balance at beginning of period........................... -- -- (183)
Translation adjustments................................ -- -- 183
-------- -------- --------
Balance at end of period................................. -- -- --
-------- -------- --------
TREASURY STOCK
Balance at beginning of period........................... (42,271) (13,962) --
Repurchase of shares................................... (14,069) (33,719) (13,875)
Shares issued under compensation plans................. 25 11 --
Odd lot program net share purchases.................... -- -- (87)
Exercise of stock options.............................. 8,944 5,399 --
-------- -------- --------
Balance at end of period................................. (47,371) (42,271) (13,962)
-------- -------- --------
TOTAL COMMON SHAREHOLDERS' EQUITY, END OF PERIOD......... $333,634 $264,282 $159,740
======== ======== ========
</TABLE>

The accompanying Notes to Financial Statements are an integral part of the
Financial Statements.

21
<PAGE> 24

LONE STAR INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
(IN THOUSANDS) ------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income............................................... $ 65,413 $ 54,160 $ 35,762
Adjustments to arrive at net cash provided by
operating activities:
Depreciation and depletion.......................... 23,591 24,060 23,628
Tax benefit realized from utilization of deferred
tax assets........................................ 25,147 25,419 15,816
Changes in operating assets and liabilities:
Accounts and notes receivable..................... (4,649) (2,227) (1,012)
Inventories and other current assets.............. (2,370) 3,713 (14,626)
Accounts payable and accrued expenses............. 4,708 967 (1,724)
Equity income, net of dividends received.......... (821) 1,772 (2,978)
Pension funding in excess of expense.............. (1,056) (12,986) (7,806)
Gain on sale of a surplus property................ (3,110) -- --
Other, net........................................ 575 1,324 3,211
-------- -------- --------
Net cash provided by operating activities................ 107,428 96,202 50,271
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures..................................... (41,977) (42,640) (36,576)
Proceeds from sales of assets............................ 56,998 319 15,406
-------- -------- --------
Net cash provided (used) by investing activities......... 15,021 (42,321) (21,170)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term senior notes......... 50,000 -- --
Redemption of long-term senior notes..................... (78,000) -- --
Proceeds from exercise of stock options.................. 4,581 3,145 1,177
Proceeds from exercise of warrants....................... 101 106 78
Purchase of treasury stock............................... (14,069) (33,719) (13,959)
Dividends paid........................................... (2,197) (2,247) (1,780)
Reduction of production payment.......................... -- -- (19,966)
-------- -------- --------
Net cash used by financing activities.................... (39,584) (32,715) (34,450)
-------- -------- --------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... 82,865 21,166 (5,349)
Cash and cash equivalents, beginning of period........... 71,215 50,049 55,398
-------- -------- --------
Cash and cash equivalents, end of period................. $154,080 $ 71,215 $ 50,049
======== ======== ========
</TABLE>

The accompanying Notes to Financial Statements are an integral part of the
Financial Statements.

22
<PAGE> 25

NOTES TO FINANCIAL STATEMENTS

1. DESCRIPTION OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Description of Operations -- The Company is a cement and ready-mixed
concrete company with operations in the United States (principally in the
Midwest and Southwest). Lone Star's cement operations consist of five portland
cement plants in the midwestern and southwestern regions of the United States, a
slag cement facility in Louisiana and a 25% interest in Kosmos Cement Company, a
partnership which operates one portland cement plant in each of Kentucky and
Pennsylvania. The five wholly-owned portland cement plants produced
approximately 3.9 million tons of cement in 1997, which approximates the rated
capacity of such plants. The Company's construction aggregates operations, prior
to its sale in October 1997, primarily served the construction markets in the
New York metropolitan area. The ready-mixed concrete business operates in the
Memphis, Tennessee area and during 1996, in central Illinois (which operations
were sold in March 1997). The Company had approximately $358,000,000 in net
sales in 1997, with cement, construction aggregates and ready-mixed concrete and
other construction products operations representing approximately 83%, 11% and
6%, respectively, of such net sales.

Demand for cement is derived primarily from residential construction,
commercial and industrial construction and public (infrastructure) construction
which are highly cyclical and are influenced by prevailing economic conditions
including interest rates and availability of public funds. Due to cement's low
value-to-weight ratio, the industry is largely regional and regional demand is
tied to local economic factors that may fluctuate more widely than those of the
nation as a whole.

The markets for the Company's products are highly competitive and portland
cement is largely a commodity product. The Company competes with domestic and
international sources largely on the basis of price. To a lesser extent, other
competitive factors such as service, delivery time and proximity to customers
affect the Company's performance.

Basis of Presentation -- The consolidated financial statements include the
accounts of Lone Star Industries, Inc. and all subsidiaries. All intercompany
transactions have been eliminated. Joint ventures are accounted for using the
equity method. Certain prior-period amounts have been reclassified to conform
with current-period presentation.

Upon emergence from its Chapter 11 proceedings in April 1994, the Company
adopted "fresh-start" reporting in accordance with AICPA Statement of Position
No. 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" ("SOP No. 90-7"), as of March 31, 1994. The Company's emergence
from these proceedings resulted in a new reporting entity with no retained
earnings or accumulated deficit as of March 31, 1994. Accordingly, the Company's
consolidated financial statements for periods prior to March 31, 1994 are not
comparable to consolidated financial statements presented on or subsequent to
March 31, 1994.

Cash and Cash Equivalents -- Cash equivalents include short-term, highly
liquid investments with original maturities of three months or less, and are
recorded at cost, which approximates market value.

Inventories -- Inventories are stated at the lower of cost or market. Cost
is determined principally by the weighted average cost method.

Property, Plant and Equipment -- Property, plant and equipment were stated
at fair market value as of March 31, 1994. Additions subsequent to March 31,
1994 are stated at cost. Property, plant and equipment are depreciated over the
estimated useful lives of the assets using the straight-line method. Useful
lives for property, plant and equipment are as follows: buildings-10 to 40
years; machinery and equipment-3 to 30 years; automobile and trucks-3 to 10
years. Significant expenditures which extend the useful lives of existing assets
are capitalized. Maintenance and repair costs are charged to current earnings.
Cost depletion related to limestone reserves is calculated using the units of
production method. The cost of assets and related accumulated depreciation is
removed from the accounts when such assets are disposed of, and any related
gains or losses are reflected in current earnings.

Income Taxes -- Deferred income taxes are provided for the temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities. In accordance with SOP No. 90-7, income tax
benefits recognized from preconfirmation net operating loss carryforwards were
used first to reduce reorganization value in excess of amounts allocable to
identifiable assets and then to increase additional paid-in capital (See Notes 7
and 20).

23
<PAGE> 26

Pension Plans -- The Company and certain of its consolidated subsidiaries
have a number of retirement plans which cover substantially all of its
employees. Defined benefit plans for salaried employees provide benefits based
on employees' years of service and five-year final overall base compensation.
Defined benefit plans for hourly-paid employees, including those covered by
multi-employer pension plans under collective bargaining agreements, generally
provide benefits of stated amounts for specified periods of service. The
Company's policy is to fund, at a minimum, amounts as are necessary on an
actuarial basis to provide assets sufficient to meet the benefits to be paid to
plan members in accordance with the requirements of the Employee Retirement
Income Security Act of 1974 ("ERISA"). Assets of the plans are administered by
an independent trustee and are invested principally in fixed income, equity
securities and real estate.

Postretirement Benefits Other Than Pensions -- The Company provides retiree
life insurance and health plan coverage to qualifying employees. The Company
accounts for these benefits on an accrual basis, under the provisions of
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions". These plans are unfunded; however,
the Company makes defined quarterly contributions to the salaried retirees'
Voluntary Employees Beneficiary Association ("VEBA") trust per the settlement
agreement reached in the Company's bankruptcy proceedings (See Note 13).

Earnings Per Common Share -- In 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
Previously reported earnings per share amounts have been restated. Basic
earnings per common share for the years ended December 31, 1997, 1996 and 1995
are calculated by dividing net income by weighted average common shares
outstanding during the period. Diluted earnings per common share for the years
ended December 31, 1997, 1996 and 1995 are calculated by dividing net income by
weighted average common shares outstanding during the period plus dilutive
potential common shares which are determined as follows:

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Weighted average common shares............................ 10,940,711 11,290,270 11,990,371
Effect of dilutive securities:
Warrants................................................ 2,367,225 1,657,663 566,189
Options to purchase common stock........................ 120,758 298,379 184,961
---------- ---------- ----------
Adjusted weighted average common shares................... 13,428,694 13,246,312 12,741,521
</TABLE>

Dilutive potential common shares are calculated in accordance with the
treasury stock method which assumes that proceeds from the exercise of all
warrants and options are used to repurchase common stock at market value. The
number of shares remaining after the proceeds are exhausted represents the
potentially dilutive effect of the securities. The increasing number of warrants
used in the calculation is a result of the increasing market value of the
Company's common stock.

Options to purchase 6,000 shares of common stock at $34.3125 were
outstanding during the second half of 1996 but were not included in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the common shares.

Environmental Matters -- In accordance with AICPA Statement of Position No.
96-1, "Environmental Remediation Liabilities", accruals for environmental
matters are recorded when it is probable that a liability has been incurred and
the amount of the liability can be reasonably estimated, or if an amount is
likely to fall within a range and no amount within that range can be determined
to be the better estimate, the minimum amount of the range is recorded. Accruals
for environmental matters exclude claims for recoveries from insurance carriers
and other third parties until it is probable that such recoveries will be
realized.

Recently Issued Accounting Pronouncements -- In June 1997, the FASB issued
SFAS No. 130, "Reporting Comprehensive Income", which requires that changes in
comprehensive income be shown in a financial statement that is displayed with
the same prominence as other financial statements. This statement is effective
for periods beginning after December 15, 1997. The Company does not expect
adoption of the statement to affect the presentation of its financial
statements.

24
<PAGE> 27

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS No. 131"), which changes the way
public companies report information about segments. SFAS No. 131, which is based
on the management approach to segment reporting, includes requirements to report
selected segment information quarterly, and entity-wide disclosures about
products and services, major customers, and the material countries in which the
entity holds assets and reports revenues. This statement is effective for
financial statements for periods beginning after December 15, 1997. Management
does not expect adoption of this statement to affect the Company's financial
statements.

Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and revenue and expenses during the periods reported.
Estimates are used when accounting for allowance for uncollectable accounts
receivable, inventory obsolescence, depreciation, employee benefit plans, taxes
and contingencies, among others. Actual results could differ from these
estimates.

2. ACCOUNTS AND NOTES RECEIVABLE

Receivables consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Trade accounts and notes receivable......................... $ 30,554 $ 37,242
Other receivables........................................... 1,501 1,193
-------- --------
32,055 38,435
Less: allowance for doubtful accounts....................... (3,838) (5,099)
-------- --------
$ 28,217 $ 33,336
======== ========
</TABLE>

Due to the nature of the Company's products, a majority of the Company's
accounts receivable are from businesses in the construction industry. Although
the Company's customer base is geographically diversified, collection of
receivables is partially dependent on the economics of the construction
industry.

3. INVENTORIES

Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Finished goods.............................................. $14,850 $24,913
Work in process and raw materials........................... 6,417 5,347
Supplies and fuel........................................... 21,836 23,609
------- -------
$43,103 $53,869
======= =======
</TABLE>

25
<PAGE> 28

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Land........................................................ $ 29,680 $ 39,182
Buildings and equipment..................................... 295,891 295,524
Construction in progress.................................... 15,028 16,753
Automobiles and trucks...................................... 27,649 32,515
-------- --------
368,248 383,974
Less accumulated depreciation and depletion................. (68,993) (60,992)
-------- --------
$299,255 $322,982
======== ========
</TABLE>

5. INTEREST COSTS

Interest costs incurred during the years ended December 31, 1997, 1996 and
1995 were $5,027,000, $7,931,000 and $9,358,000, respectively. Interest
capitalized during the years ended December 31, 1997, 1996 and 1995 was
$1,442,000, $1,325,000 and $262,000, respectively. Interest paid during the
years ended December 31, 1997, 1996 and 1995 was $7,292,000, $7,931,000 and
$9,654,000, respectively.

6. KOSMOS CEMENT COMPANY

The Company's investment in and advances to joint ventures at December 31,
1997 and 1996 consists of its 25% investment in Kosmos Cement Company
("Kosmos"). Kosmos is a partnership with cement plants in Kosmosdale, Kentucky
and Pittsburgh, Pennsylvania.

The amount of cumulative unremitted earnings of joint ventures included in
consolidated retained earnings at December 31, 1997, was $2,701,000. During the
years ended December 31, 1997, 1996 and 1995, $7,750,000, $9,150,000 and
$3,750,000, respectively, of distributions were received from Kosmos.

Summarized financial information of Kosmos as of and for the years ended
December 31, 1997, 1996 and 1995 is as follows (in thousands):

<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current assets.............................................. $ 30,341 $ 27,368 $ 37,086
Property, plant and equipment, net.......................... 73,098 74,038 74,656
Cost in excess of net assets of businesses acquired......... 21,765 22,485 23,205
Current liabilities......................................... (4,581) (4,893) (5,404)
Other liabilities........................................... (4,091) (2,581) (2,871)
-------- -------- --------
Net assets.................................................. $116,532 $116,417 $126,672
-------- -------- --------
Net sales................................................... $ 94,653 $ 88,300 $ 76,432
Gross profit................................................ $ 33,484 $ 26,935 $ 23,894
Net income.................................................. $ 31,115 $ 26,345 $ 23,742
</TABLE>

At December 31, 1997, 1996 and 1995, the Company's share of the underlying
net assets of Kosmos Cement Company exceeded its investment by $8,807,000,
$9,600,000 and $10,516,000, respectively, and is being amortized over the
estimated remaining life of the assets.

7. DEFERRED TAX ASSET

As of December 31, 1995, the Company had various net deferred tax assets
made up primarily of the expected future tax benefit of net operating loss
carryforwards, various credit carryforwards and reserves not yet deductible for
tax

26
<PAGE> 29

purposes. A valuation allowance was provided in full against these net deferred
tax assets upon the Company's emergence from bankruptcy when "fresh-start"
reporting was adopted.

During 1997 and 1996, the Company reduced the valuation allowance related
to the remaining net tax assets by $12,893,000 and $81,889,000, respectively.
The reduction reflects the Company's expectation that it is more likely than not
that it will generate future taxable income to utilize this amount of net
deferred tax assets. The benefit from this reduction was recorded as an increase
in additional paid-in capital in accordance with SOP No. 90-7.

During 1997 and 1996, approximately $25,000,000 of net deferred tax assets
were utilized in each year.

8. ACCRUED LIABILITIES

Accrued liabilities consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Postretirement benefits other than pensions................. $ 7,563 $ 7,563
Insurance................................................... 3,726 3,862
Taxes other than income taxes............................... 3,480 1,899
Payroll and vacation pay.................................... 2,863 3,123
Interest.................................................... 1,005 3,270
Pensions.................................................... -- 2,317
Other....................................................... 27,780 22,204
------- -------
$46,417 $44,238
======= =======
</TABLE>

9. SENIOR NOTES PAYABLE

In April 1994, the Company issued $78,000,000 of ten year senior unsecured
notes due July 31, 2003, which bore interest at a rate of 10% per annum. In
March 1997, the Company redeemed $28,000,000 of these senior notes and called
for the early redemption of the remaining $50,000,000 in the second quarter of
1997. In April 1997, the remaining $50,000,000 of the 10% senior notes were
redeemed at par plus accrued interest of $1,125,000.

In March 1997, the Company issued $50,000,000 of 7.31% senior notes due in
2007. The note purchase agreement imposes certain operating and financial
restrictions on the Company. Such restrictions limit, among other things, the
ability of the Company to incur additional indebtedness, create liens, engage in
mergers and acquisitions, purchase the Company's capital stock and warrants or
pay dividends. Commencing in the year 2001, the Company is required to make
annual principal payments of $7,142,857.

10. CREDIT AGREEMENT

In April 1994, the Company entered into a three-year $35,000,000 revolving
credit agreement. In March 1997, the Company canceled this agreement and
replaced it with a new $100,000,000 unsecured revolving credit facility which
will allow the Company to borrow funds at lower interest rates and increase the
Company's ability to repurchase common stock and warrants. Advances under this
agreement bear interest at a rate, which is the Company's option, of either
prime or LIBOR plus 37.5 to 75 basis points. A fee of 12.5 to 25 basis points is
charged on the unused portion of the credit line. The number of basis points
used in both the LIBOR interest rate and the commitment fee is determined by the
Company's capital structure. The credit agreement expires on April 30, 2002.
Although the Company has used the letter of credit facility provided by the
credit agreement, it has never borrowed under the credit agreement.

11. LEASES

Net rental expense for the years ended December 31, 1997, 1996 and 1995 was
$3,593,000, $3,344,000 and $5,146,000, respectively. Minimum rental commitments
under all non-cancelable leases principally pertaining to land, buildings and
equipment are as follows: 1998-$1,185,000; 1999-$934,000; 2000-$221,000;
2001-$178,000; 2002-$177,000; after 2002-$903,000. Certain leases include
options for renewal or purchase of leased property.

27
<PAGE> 30

12. PENSION PLANS

The Company sponsors a number of defined benefit retirement plans which
cover substantially all employees. Defined benefit plans for salaried employees
provide benefits based on employees' years of service and five-year final
average base compensation. Defined benefit plans for hourly-paid employees
generally provide benefits of stated amounts for specified periods of service.
The Company's policy is to fund, at a minimum, amounts as are necessary on an
actuarial basis to provide assets sufficient to meet the benefits to be paid to
plan members in accordance with the requirements of ERISA.

Net periodic pension cost of defined benefit plans included the following
components (in thousands):

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest cost............................................... $ 10,489 $ 10,214 $ 10,104
Service cost -- benefit accrued during the period........... 1,793 1,938 1,627
Actual return on plan assets................................ (29,964) (18,803) (28,824)
Net amortization and deferral............................... 18,252 9,019 20,469
-------- -------- --------
Net pension cost............................................ $ 570 $ 2,368 $ 3,376
======== ======== ========
</TABLE>

The following tables present the plans' funded status and amounts
recognized in the accompanying consolidated balance sheets at December 31, 1997
and 1996 (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits........................................... $142,901 $135,686
Non-vested benefits....................................... 4,596 4,290
-------- --------
Accumulated benefit obligation.............................. $147,497 $139,976
-------- --------
Projected benefit obligation................................ $153,732 $144,968
Plan assets at fair value................................... 192,954 172,715
-------- --------
Projected benefit obligation less than plan assets.......... 39,222 27,747
Unrecognized prior service cost............................. 4,190 4,518
Unrecognized net gain....................................... (42,039) (31,948)
-------- --------
Pension asset............................................... $ 1,373 $ 317
======== ========
</TABLE>

All of the Company's pension plans were overfunded as of December 31, 1997
and 1996.

The weighted average discount rates of 7.0% and 7.5% for 1997 and 1996,
respectively, and the rate of annual increase in future compensation levels of
4.5% for both 1997 and 1996, were used in determining the actuarial present
values of the projected benefit obligation. The expected long-term rate of
return on plan assets was 8.0% for both 1997 and 1996.

Certain union employees are covered under union sponsored multi-employer
pension plans pursuant to collective bargaining agreements. Multi-employer
pension expenses and contributions to the plans in the years ended December 31,
1997, 1996 and 1995, were approximately $140,000, $300,000 and $300,000,
respectively.

13. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

The Company provides retiree life insurance and health plan coverage to
employees qualifying for early, normal or disability pension benefits under the
Company's salaried employees' pension plan and certain of the pension plans for
hourly-compensated employees. Life insurance protection presently provided to
retirees under the salaried employees' pension plan is one-half their active
employment coverage declining to 25% of their active employment coverage at age
70. The coverage provided under hourly plans is fixed, as provided under the
terms of the plans. Health care coverage presently is extended to retirees and
their qualified dependents only during the retirees' lifetime. The coverage
provided

28
<PAGE> 31

assumes participation by the retiree in the Medicare program and benefit
payments are integrated with Medicare benefit levels. The Company's
postretirement benefit plans other than pension plans are not funded. Claims are
paid as incurred.

As part of its emergence from Chapter 11 proceedings, the Company reached
settlements with the salaried and union retirees with respect to reductions and
modifications of retiree medical and life insurance benefits. As part of the
settlement with salaried retirees, the Company established a Voluntary Employees
Beneficiary Association ("VEBA"), a tax-exempt trust, and agreed to make defined
quarterly contributions to the trust. The Company has the option to prepay all
future quarterly contributions to the VEBA in a single cash amount equal to 110%
of the discounted present value (using an 8.5% discount factor) of all future
quarterly contributions. The Company made contributions of $4,425,000,
$4,428,000 and $4,378,000 to the VEBA during the years ended December 31, 1997,
1996 and 1995.

Net periodic postretirement benefit cost for the years ended December 31,
1997, 1996 and 1995 included the following components (in thousands):

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost -- benefits attributed to service during the
period.................................................... $1,264 $1,603 $1,548
Interest cost on accumulated postretirement benefit
obligation................................................ 7,364 7,618 8,595
Net amortization and deferral............................... (2,575) (1,783) (1,182)
------ ------ ------
Net periodic postretirement benefit cost.................... $6,053 $7,438 $8,961
====== ====== ======
</TABLE>

Benefits paid, including VEBA contributions, were approximately $6,639,000,
$6,681,000 and $7,255,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.

The actuarial and recorded liabilities for these postretirement benefits,
none of which have been funded, are as follows at December 31, 1997 and 1996 (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................. $ 73,779 $ 76,181
Fully eligible active plan participants................... 10,979 14,697
Other active plan participants............................ 9,550 12,318
-------- --------
Accumulated postretirement benefit obligation............... 94,308 103,196
Unrecognized net gain....................................... 36,983 36,586
-------- --------
Accrued postretirement benefit cost......................... 131,291 139,782
Less current portion........................................ 7,563 7,563
-------- --------
Long-term accrued post-retirement benefit cost.............. $123,728 $132,219
======== ========
</TABLE>

The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% and 7.5% for 1997 and 1996,
respectively. Compensation levels are assumed to increase annually at a rate of
4.5% in both 1997 and 1996.

For measurement purposes, a 10.0% annual medical rate of increase is
assumed for 1998 for both pre-medicare and post-medicare claims; the rate is
assumed to decrease 1/2% each year to 6.0% per year after 2005. The health care
cost trend rate assumption has a significant effect on the amounts reported. To
illustrate, increasing the assumed health care cost trend rates by 1 percentage
point in each year would increase the accumulated postretirement benefit
obligation as of December 31, 1997 by approximately $5,847,000 and the aggregate
of the service and interest cost components of net periodic postretirement
benefit cost for the year ended December 31, 1997 by approximately $759,000.

In 1997, the Company recorded a $7,905,000 settlement gain related to the
sale of the Company's New York construction aggregates operations. This gain was
included in the calculation of the net results of the sale.

29
<PAGE> 32

14. COMMON STOCK

In April 1994, the Company authorized 25,000,000 shares of $1.00 par value
common stock and issued 12,000,000 shares of that common stock. In 1995, the
authorized number of shares of common stock was increased from 25,000,000 to
50,000,000. Transactions in common stock are as follows:

<TABLE>
<CAPTION>
COMMON TREASURY
SHARES SHARES
------ --------
<S> <C> <C>
Balance, December 31, 1994.................................. 12,000,016 --
Exercise of warrants........................................ 4,140 --
Exercise of options......................................... 76,688 --
Odd lot program net share purchases......................... -- 4,157
Purchase of shares.......................................... -- 600,000
---------- ---------
Balance, December 31, 1995.................................. 12,080,844 604,157
Exercise of warrants........................................ 5,666 --
Exercise of options......................................... -- (204,565)
Purchase of shares.......................................... -- 974,317
Stock issued under compensation plans....................... -- (400)
---------- ---------
Balance, December 31, 1996.................................. 12,086,510 1,373,509
Exercise of warrants........................................ 5,356 --
Exercise of options......................................... -- (290,500)
Purchase of shares.......................................... -- 283,800
Stock issued under compensation plans....................... -- (800)
---------- ---------
Balance, December 31, 1997.................................. 12,091,866 1,366,009
========== =========
</TABLE>

At December 31, 1997, the Company has reserved 5,665,898 shares of its
authorized but unissued common stock for possible future issuance in connection
with the exercise of the warrants to purchase common stock (3,988,148 shares)
and the exercise of stock options (1,677,750 shares).

Since the second quarter of 1995, the Company has paid a $0.05 per share
quarterly cash dividend. In addition, on February 19, 1998, the Board of
Directors declared a $0.05 dividend per common share, payable on March 16, 1998
to shareholders of record as of March 1, 1998. The Company's financing
agreements and the revolving credit facility contain certain restrictive
covenants which, among other things, could have the effect of limiting the
payment of dividends and the repurchase of common stock and warrants.
Approximately $101,300,000 is currently available for such payments under the
most restrictive of such covenants (See Notes 9 and 10).

As part of a stock repurchase program, in 1997 the Company purchased
283,800 shares of treasury stock in open market transactions for $14,069,000. In
1996, the Company purchased 272,401 shares of treasury stock in open market
transactions for $8,457,000 and purchased 700,000 shares of its common stock in
private transactions for $25,200,000. In 1995, the Company repurchased 600,000
shares of its common stock for $13,875,000. An additional 1,916 shares were
received in 1996, in lieu of cash, by the Company in connection with the
exercise of certain employee stock options.

In 1995, the Board of Directors approved a plan to repurchase common stock
from shareholders who own less than 100 shares, and to allow shareholders to
increase their shares owned up to 100 shares. No brokerage commissions were
incurred by shareholders related to these transactions. A total of 24,454 shares
were tendered for sale by the shareholders and shareholders purchased 20,297
shares under this program.

In January 1998, pursuant to an order signed by the U.S. Bankruptcy Court,
14,572 shares of common stock were transferred to the Company as they were
considered undeliverable in the Company's Chapter 11 proceedings. These shares
have been recorded as treasury shares and there was no effect on total equity of
the Company as a result.

30
<PAGE> 33

15. WARRANTS TO PURCHASE COMMON STOCK

In April 1994, the Company issued 4,003,333 warrants to purchase common
stock at an exercise price of $18.75 per share. Each warrant entitles the holder
thereof to purchase one share of common stock. The warrants are non-callable,
non-redeemable and expire on December 31, 2000. As of December 31, 1997, there
were 3,988,148 warrants outstanding.

The number of shares of common stock purchasable upon the exercise of each
warrant and the exercise price of the warrant are subject to adjustment if the
Company (i) pays a dividend in shares of common stock, (ii) subdivides its
outstanding shares of common stock, (iii) combines its outstanding shares of
common stock into a smaller number of shares of common stock, or issues by
reclassification or recapitalization of its shares of common stock, other
securities of the Company or (iv) issues certain stock rights convertible into,
or exchangeable for, common stock. An adjustment will not result from the
Company's sale of common stock on the open market or from the declaration of
regular cash dividends.

In January 1998, pursuant to an order signed by the U.S. Bankruptcy Court,
31,033 warrants were transferred to the Company as they were considered
undeliverable in the Company's Chapter 11 proceedings. The returned warrants
will be cancelled.

16. STOCKHOLDER RIGHTS PLAN

In November 1994, the Board of Directors adopted a Stockholder Rights Plan
("rights plan") under which stock purchase rights were distributed as a dividend
to holders of common stock payable to the shareholders of record on December 19,
1994. Management believes that the rights plan represents a means of deterring
abusive and coercive takeover tactics not offering an adequate price to all
stockholders, and seeks to ensure that stockholders realize the long-term value
of their investments.

The rights plan provides that if, subject to certain exemptions, any person
or group acquires 15% or more of the Company's common stock, each right not
owned by a 15% or more stockholder or related parties will entitle its holder to
purchase, at the right's then current exercise price, shares of common stock
having a value of twice the right's then current exercise price. This right to
purchase common stock at a discount will not be triggered by a person's or
group's acquisition of 15% or more of the common stock pursuant to a tender or
exchange offer which is for all outstanding shares at a price and on terms that
the Board of Directors determines (prior to acquisition) to be adequate and in
the best interests of the Company and its stockholders. In addition, this right
will not be triggered by the stockholdings of certain existing stockholders.

Under the rights plan, holders of the rights will initially be entitled to
buy one-tenth of a share of the Company's common stock at an exercise price of
$70.00 for each whole share which a holder of rights may purchase. Until a
person or group acquires 15% or more of the common stock or commences a tender
or exchange offer for 15% or more of the common stock, the rights will attach to
and trade with the common stock. The rights will expire in the year 2004.

The Company may redeem the rights, at the option of the Board of Directors,
at a redemption price of $0.01 per right at any time prior to the acquisition by
any person or group of 15% or more of the common stock. In addition, after a
person or group has acquired 15% or more of the common stock but before any
person or group has acquired 50% or more of the common stock, the Company may
exchange shares of common stock for rights.

17. STOCK COMPENSATION PLANS

At December 31, 1997, the Company had three stock-based compensation plans,
which are described below. As of January 1, 1996, the Company adopted Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). The Company has chosen to continue to apply
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its plans. Accordingly,
no compensation cost has been recognized for its stock option plans. Had
compensation cost for the Company's stock-based compensation plans been
determined consistent with SFAS No. 123, the Company's net income for the years
ended December 31, 1997, 1996 and 1995 would have been $65,347,000, $54,082,000
and $35,666,000, respectively. Pro forma basic and diluted earnings per share
for the years ended December 31, 1997, 1996 and 1995 would have been $5.97,
$4.79 and $2.97, and $4.87, $4.08 and $2.80, respectively. The pro forma effect
of stock option grants on

31
<PAGE> 34

net income for 1997, 1996 and 1995 may not be representative of the pro forma
effect on net income in future years due to the small number of options granted
during 1997, 1996 and 1995 and the exclusion of option grants made prior to
1995.

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997, 1996, 1995 (Directors Plan) and 1995
(Management Plan), respectively: dividend yield of 0.52, 0.58, 0.96 and 0.93
percent; expected volatility of 31, 28, 23 and 27 percent, risk-free interest
rates of 5.44, 6.29, 5.30 and 5.30 percent; and expected lives of 4 years for
all grants.

Under the Management Stock Option Plan ("Management Plan"), the Company has
granted options to its employees for 700,000 shares of common stock. Under the
Directors Stock Option Plan ("Directors Plan"), the Company may grant options to
its Directors for up to 50,000 shares of common stock. Under the 1996 Long Term
Incentive Plan ("Incentive Plan"), the Company may grant up to 1,500,000 stock
options and/or stock appreciation rights to its employees. No options were
granted under the Incentive Plan in 1997 or 1996. Under all plans, the exercise
price of each option must be equal to or greater than the market price of the
Company's stock on the date of grant, and an option's maximum term is ten years.
Options granted under the Management Plan vest over a three-year period and
options granted under the Directors Plan become vested after six months. Options
granted under the Incentive Plan become vested after a minimum of one year from
the grant date.

A summary of the status of the Company's Management and Directors Plans as
of and for the years ended December 31, 1997, 1996 and 1995 is presented below:

<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE OPTIONS OPTIONS
PRICE OUTSTANDING EXERCISABLE
--------------- -------------- --------------
<S> <C> <C> <C>
Balance, December 31, 1994................................. $15.378 706,000 368,754
Options granted.......................................... $21.355 31,000 --
Options exercised........................................ $15.375 (77,185) (77,185)
Options which became exercisable......................... $15.939 -- 125,004
Options expired or canceled.............................. $15.375 (25,000) (12,500)
-------- --------
Balance, December 31, 1995................................. $15.670 634,815 404,073
Options granted.......................................... $34.313 6,000 --
Options exercised........................................ $15.375 (204,565) (204,565)
Options which became exercisable......................... $16.598 -- 124,242
-------- --------
Balance, December 31, 1996................................. $16.065 436,250 323,750
Options granted.......................................... $38.375 6,000 --
Options exercised........................................ $15.770 (290,500) (290,500)
Options which became exercisable......................... $16.945 -- 112,250
-------- --------
Balance, December 31, 1997................................. $17.510 151,750 145,500
======== ========
</TABLE>

Options available for future grants under the Directors Plan were 26,000
and 32,000 at December 31, 1997 and 1996, respectively. Options available for
future grants under the Incentive Plan were 1,500,000 at December 31, 1997 and
1996.

The following table summarizes information about stock options outstanding
at December 31, 1997:

<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
DECEMBER 31, 1997 -------------------------------------------------
------------------------------ REMAINING OPTION EXERCISE PRICES
NUMBER NUMBER CONTRACTUAL ------------------------------
RANGE OF EXERCISE PRICES OUTSTANDING EXERCISABLE LIFE OUTSTANDING EXERCISABLE
- ------------------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$15.375-$15.688 127,500 127,500 6.5 years $15.389 $15.389
$20.750-$21.50 12,250 6,000 8.0 years.. $21.133 $20.750
$34.313 6,000 6,000 8.5 years $34.313 $34.313
$38.375 6,000 6,000 9.5 years.. $38.375 $38.375
------- -------
151,750 145,500
======= =======
</TABLE>

32
<PAGE> 35

18. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at December 31, 1997 (in thousands). In
accordance with Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments", the fair value of a
financial instrument is the amount at which the instrument could be exchanged in
a current transaction between willing parties.

<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------
CARRYING FAIR
AMOUNT VALUE
-------- -----
<S> <C> <C>
Financial assets:
Cash and cash equivalents................................. $154,080 $154,080
Financial liabilities:
Senior notes payable...................................... $ 50,000 $ 50,000
</TABLE>

The carrying amounts shown in the table are included in the accompanying
consolidated balance sheet under the indicated captions.

The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:

Cash and cash equivalents -- the carrying amount approximates fair value
because of the short maturity of those instruments.

Senior notes payable -- the fair value of this privately-placed long-term
debt is based on quoted market prices of similar issues of publicly traded debt.
The carrying amount of the debt approximates fair value due to the recent issue
of the debt.

19. OTHER INCOME, NET

Other income, net, consists of the following (in thousands):

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest income on investments.............................. $4,892 $2,552 $2,857
Gain on sale of surplus property............................ 3,110 -- --
Other, net.................................................. (79) 455 1,183
------ ------ ------
$7,923 $3,007 $4,040
====== ====== ======
</TABLE>

33
<PAGE> 36

20. INCOME TAXES

Provision for income taxes consists of the following (in thousands):

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal income tax provision:
Current................................................... $ 7,301 $ 1,314 $ 1,098
------- -------- --------
Deferred:
Difference between tax and book depreciation........... 1,008 3,402 1,308
Sale of assets......................................... (918) 2,467 7,868
Investment and other credits........................... (7,301) 1,139 (864)
Net operating loss carryforward........................ 22,151 8,453 1,308
Restructuring and other reserves....................... 7,132 6,204 10,184
Change in valuation allowance.......................... (9,346) (75,109) (18,504)
Other, net............................................. (1,656) 3,543 (1,300)
------- -------- --------
Total deferred............................................ 11,070 (49,901) --
------- -------- --------
Increase in additional paid-in capital.................... 9,346 71,289 14,196
------- -------- --------
Total federal income tax provision.......................... 27,717 22,702 15,294
------- -------- --------
State and local income tax provision:
Current................................................... 875 877 700
Deferred.................................................. 4,731 4,031 --
Change in valuation allowance............................. (3,547) (10,600) --
Increase in additional paid-in capital.................... 3,547 10,600 1,620
------- -------- --------
Total state and local income tax provision.................. 5,606 4,908 2,320
------- -------- --------
Provision for income taxes.................................. $33,323 $ 27,610 $ 17,614
======= ======== ========
</TABLE>

As of December 31, 1997, the Company has investment tax credit
carryforwards for federal income tax purposes of $2,125,000 which expire at
various dates through 2001. The Company also has regular tax net operating loss
carryforwards of approximately $115,000,000 that expire at various dates through
2009 and an alternative minimum tax credit carryforward of $16,724,000. The
Internal Revenue Code of 1986, as amended (the "Code"), imposes limitations
under certain circumstances on the use of carryforwards upon the occurrence of
an "ownership change" (as defined in Section 382 of the Code). An "ownership
change" resulted from the issuance of equity securities by the Company as part
of its plan of reorganization. Such an "ownership change" limits the use of a
portion of the Company's carryforwards in any one year. The Company believes it
is more likely than not that all of its carryforwards will be utilized prior to
their expiration.

34
<PAGE> 37

The following is a schedule of consolidated pre-tax income and a
reconciliation of income taxes computed at the U.S. statutory rate to the
provision for income taxes (in thousands):

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income before income taxes.................................. $98,736 $81,770 $53,376
------- ------- -------
Tax provision computed at statutory rates................... 34,558 28,620 18,681
Differences resulting from:
Foreign subsidiaries, net................................. -- -- 140
State tax, net............................................ 3,669 3,190 2,320
Other, including percentage depletion..................... (4,904) (4,200) (3,527)
------- ------- -------
Provision for income taxes................................ $33,323 $27,610 $17,614
======= ======= =======
</TABLE>

Components of net deferred tax assets as of December 31, 1997 and 1996 are
as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Current tax assets related to:
Reserves not yet deducted................................. $ 3,825 $ 4,524
Valuation allowance....................................... -- (913)
-------- --------
Net current deferred tax assets............................. 3,825 3,611
Non-current tax assets related to:
Reserves not yet deducted................................. 2,744 4,134
Reserve for retiree benefits.............................. 42,893 46,277
Loss carryforwards........................................ 40,252 62,953
Investment tax credits.................................... 2,125 4,559
Alternative minimum tax credits........................... 16,724 6,817
Net state................................................. 3,888 6,698
-------- --------
108,626 131,438
Non-current tax liabilities related to:
Fixed assets.............................................. (53,320) (54,194)
Other..................................................... (14,490) (14,932)
Domestic joint ventures................................... (3,155) (2,967)
-------- --------
(70,965) (72,093)
Valuation allowance....................................... -- (11,980)
-------- --------
Total long-term net deferred tax assets..................... 37,661 47,365
-------- --------
Total net deferred tax assets............................... $ 41,486 $ 50,976
======== ========
</TABLE>

In accordance with AICPA Statement of Position No. 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code", income tax
benefits recognized from preconfirmation net operating loss carryforwards and
other tax assets were used first to reduce the reorganization value in excess of
amounts allocable to identifiable assets and then to increase additional paid-in
capital.

Net income taxes paid during the years ended December 31, 1997, 1996 and
1995, were $7,187,000, $812,000 and $395,000, respectively.

35
<PAGE> 38

21. ASSET DISPOSITIONS

In October 1997, the Company sold its New York construction aggregates
operations, including working capital, for $43,186,000, which approximated book
value.

In September 1997, the Company received $3,110,000 from the sale of a
parcel of surplus real estate in Massachusetts. The gain on the sale is included
in other income on the accompanying consolidated statement of operations.

In March 1997, the Company sold its central Illinois ready-mixed and other
concrete operations, including inventories, for proceeds equal to book value of
$10,500,000. Total proceeds included a note receivable for $1,650,000.

In December 1995, the Company sold its concrete railroad cross-tie plant
and office building in Denver, Colorado for $2,250,000, which approximated book
value.

In October 1995, the Company sold the assets of its Nova Scotia, Canada
aggregate quarry, including working capital, for $11,408,000, which approximated
book value.

In February, March and June 1995, the Company sold the assets of its hollow
metal door/hardware business in Illinois, a piece of surplus property in
Mississippi and a cement terminal in Florida for $290,000, $325,000 and
$390,000, respectively. The Company had been leasing the terminal to the buyer
prior to the sale.

The operations sold in 1997 and 1995 contributed the following results for
the period through their respective dates of disposition (in thousands):

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales................................................... $40,326 $69,848 $64,744
Pre-tax income.............................................. $ 1,011 $ 5,467 $ 555
</TABLE>

22. ENVIRONMENTAL REGULATION

36
<PAGE> 39

its cement manufacturing facilities at various dates through 1999. As part of
the permitting process, the Company may be required to install equipment to
monitor emissions of air pollutants from its facilities. In addition, the Clean
Air Act amendments require the United States Environmental Protection Agency
("EPA") to develop regulations directed at reducing emissions of toxic air
pollutants from a variety of industrial sources, including the portland cement
manufacturing industry. As part of this process, the EPA will identify maximum
available control technology ("MACT") for the reduction of emissions of air
toxics from cement manufacturing facilities. On April 27, 1997, the EPA
announced new proposed MACT standards for those cement manufacturing facilities
(like Lone Star's Greencastle and Cape Girardeau plants) that burn hazardous
waste fuels ("HWF"). The proposed standards are extremely lengthy and complex
and have been commented on by concerned parties. They are anticipated by the
Company to be effective in late 1998 and thereafter will be implemented over a
three-year period. Depending on their final terms when effective, they could
have the effect of limiting or eliminating the use of HWF at one or both
facilities. The Company anticipates that standards for facilities burning fossil
fuels will be initially proposed in 1998. In August 1997, the EPA promulgated
under the Clean Air Act new standards for small particulate matter and ozone
emissions, and related testing will be carried out over the next several years.
Depending on the results of this testing, additional regulatory burdens could be
imposed on the cement industry by states not in compliance with the regulations.
On October 10, 1997, the EPA proposed new regulations to reduce nitrogen oxide
emissions substantially over the next eight years. This proposal would affect 22
states including three in which the Company has cement plants: Indiana, Illinois
and Missouri. Depending on state implementation, this emissions reduction could
adversely affect the cement industry in these states.

The Resource Conservation and Recovery Act ("RCRA") establishes a
cradle-to-grave regulatory scheme governing the generation, treatment, storage,
handling, transportation and disposal of solid wastes. Solid wastes which are
classified as hazardous wastes pursuant to RCRA, as well as facilities that
treat, store or dispose of such hazardous wastes, are subject to stringent
regulatory requirements. Generally, wastes produced by the Company's operations
are not classified as hazardous wastes and are subject to less stringent federal
and state regulatory requirements. Cement kiln dust ("CKD"), a by-product of
cement manufacturing, is currently exempted from regulation as a hazardous waste
pursuant to the Bevill Amendment to RCRA. However, in 1995, the EPA issued a
regulatory determination regarding the need for regulatory controls on the
management, handling and disposal of CKD. Generally, the EPA regulatory
determination provides that the EPA intends to draft and promulgate regulations
imposing controls on the management, handling and disposal of CKD that will be
based largely on selected components of the existing RCRA hazardous waste
regulatory program, tailored to address the specific regulatory concerns posed
by CKD. The EPA regulatory determination further provides that new CKD
regulations will be designed both to be protective of the environment and to
minimize the burden on cement manufacturers. While it is not possible to predict
at this time precisely what new regulatory controls on the management, handling
and disposal of CKD or what increased costs (or range of costs) would be
incurred by the Company to comply with these requirements, the EPA announced in
1996 that regulations will be promulgated through a rulemaking scheduled to be
completed shortly, and that, thereafter, these rules will be implemented over a
three-year period. The types of controls being considered by the EPA include
fugitive dust emission controls, restrictions for landfills located in sensitive
areas, groundwater monitoring, standards for liners and caps, metals limits and
corrective action for currently active units.

37
<PAGE> 40

extensive and complex technical requirements of the BIF Rules, there can be no
assurances that the Company will be able to maintain compliance with the BIF
Rules or that changes to such rules or their interpretation by the relevant
agencies or courts might not make it more difficult or cost-prohibitive to
continue to burn HWF.

The December 31, 1997 consolidated balance sheet includes accruals of
$6,600,000 which represent the Company's current estimate of its liability
related to future remediation costs at sites where known environmental
conditions exist. The Company believes these reserves to be adequate for known
environmental matters.

23. LEGAL PROCEEDINGS

38
<PAGE> 41

suit against SanVel and the Company alleging, among other things, that San-Vel
was negligent in producing, and that it breached representations relating to,
the pilings. At the request of the City of Boston, San-Vel has provided a list
of the approximate twenty-five other buildings built in that City between 1980
and 1990 using San-Vel pilings. The City has reportedly inspected these
buildings visually, without noting any apparent piling failure. Certain
engineering studies also have been conducted, and those limited results that
have been made available to the Company do not indicate any additional failures.
The Company believes that San-Vel used cement produced by Lone Star at one of
its formerly owned cement plants to mix the concrete from which pilings in
certain of these buildings (including the demolished building) were produced.
There has been no indication that Lone Star's production of this cement was
defective. The Company is contesting this lawsuit vigorously, and believes that
it has good defenses to the lawsuit. All of the foregoing matters are being
defended by the Company's insurers. No assurances as to their ultimate outcome
can be given.

24. QUARTERLY FINANCIAL DATA (UNAUDITED)

Summarized quarterly financial data for 1997 and 1996 is as follows (in
thousands except per share data):

<TABLE>
<CAPTION>
QUARTER
---------------------------------------
1997 FIRST SECOND THIRD FOURTH
- ---- ----- ------ ----- ------
<S> <C> <C> <C> <C>
Net sales................................................ $60,836 $104,618 $111,775 $80,336
Gross profit............................................. $ 8,516 $ 36,241 $ 41,868 $28,468
Net income............................................... $ 264 $ 20,181 $ 27,722 $17,246
------- -------- -------- -------
Basic earnings per common share.......................... $ 0.02 $ 1.84 $ 2.52 $ 1.58
------- -------- -------- -------
Diluted earnings per common share........................ $ 0.02 $ 1.53 $ 2.04 $ 1.27
------- -------- -------- -------
</TABLE>

<TABLE>
<CAPTION>
QUARTER
---------------------------------------
1996 FIRST SECOND THIRD FOURTH
- ---- ----- ------ ----- ------
<S> <C> <C> <C> <C>
Net sales................................................ $52,987 $102,307 $118,349 $94,030
Gross profit............................................. $ 2,208 $ 31,989 $ 42,993 $29,771
Net income (loss)........................................ $(3,276) $ 17,263 $ 25,346 $14,827
------- -------- -------- -------
Basic earnings per common share.......................... $ (0.29) $ 1.51 $ 2.23 $ 1.36
------- -------- -------- -------
Diluted earnings per common share........................ $ (0.29) $ 1.28 $ 1.91 $ 1.13
------- -------- -------- -------
</TABLE>

- ---------------
(1) Gross profit is net of depreciation expense relating to cost of sales of
$23,182,000 and $23,598,000, in the years ended December 31, 1997 and 1996,
respectively.

(2) Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share in 1997
and 1996 does not equal the total computed for the year. In accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share",
earnings per share for previously reported periods have been restated (See
Note 1).

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

Not applicable.

PART III

The information required by Part III (Items 10-13) is incorporated herein
by reference to the captions "Election of Directors", "Executive Compensation"
and "Security Ownership of Certain Beneficial Owners and Management" in the
Company's definitive proxy statement which pursuant to Regulation 14A will be
filed not later than 120 days after the end of the fiscal year covered by this
Report. Certain information relating to the Company's executive officers is
included in Part I of this Report under the caption "Executive Officers of
Registrant".

39
<PAGE> 42

PART IV

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

(a) The following documents are filed as a part of this Report:

1. FINANCIAL STATEMENTS AND SCHEDULE: See Index to Financial
Statements and Schedule on page 17 of this Report.

2. EXHIBITS:

<TABLE>
<C> <C> <S>
2.1 -- Voluntary Petition for Relief under Chapter 11 of the United
States Bankruptcy Code dated December 10, 1990 (incorporated
herein by reference to Exhibit 28A of the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1990).
2.2 -- Modified Amended Disclosure Statement Regarding Debtors'
Modified Amended Consolidated Plan of Reorganization and
exhibits thereto (incorporated herein by reference to the
Registrant's Form T-3 filed January 14, 1994).
2.3 -- Modification of Debtor's Plan of Reorganization
(incorporated herein by reference to Exhibit 2 of the
Registrant's Current Report on Form 8-K dated March 1,
1994).
2.4 -- Order Confirming Debtors' Modified Amended and Consolidated
Plan of Reorganization Under Chapter 11 of the Bankruptcy
Code dated February 17, 1994 (incorporated herein by
reference to Exhibit 28E of the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1993).
3.1 -- Amended and Restated Certificate of Incorporation
(incorporated herein by reference to Exhibit 3.1 of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994).
3.2 -- Certificate of Amendment of Restated Certificate of
Incorporation (incorporated herein by reference to Exhibit
3.1 of the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1995).
3.3 -- Amended By-Laws (incorporated herein by reference to Exhibit
3(ii) of the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1994).
4.1 -- Form of Note Purchase Agreement, dated as of March 10, 1997,
relating to the Company's $50 million principal amount of
7.31% Senior Notes Due 2007 (incorporated herein by
reference to Exhibit 4.1 of the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1996).
4.2 -- Credit Agreement by and among the Registrant, NBD Bank, N.A.
(as Agent) and the Lenders that are signatories thereto,
dated as of June 30, 1997 (incorporated herein by reference
to Exhibit 4.4 of the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997).
4.3 -- Warrant Agreement, dated April 13, 1994, between Lone Star
Industries, Inc. and Chemical Bank, as Warrant Agent
(incorporated herein by reference to Exhibit 4B of the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1994).
4.4 -- Rights Agreement, dated as of November 10, 1994, between
Lone Star Industries, Inc. and Chemical Bank (incorporated
herein by reference to the Registrant's Form 8-A, dated
November 17, 1994).
10.1 -- Settlement Agreement, dated as of February 4, 1994, between
Lone Star Industries, Inc., et al. and the Official
Committee of Retired Employees of Lone Star Industries,
Inc., et al. (incorporated herein by reference to Exhibit
10.23 of the Registrant's Registration Statement on Form
S-1, File Number 33-55377).
10.2 -- Agreement, dated as of March 11, 1994, by and between the
Debtors and the Unions (incorporated herein by reference to
Exhibit 10.25 of the Registrant's Registration Statement on
Form S-1, File Number 33-55377).
</TABLE>

40
<PAGE> 43
<TABLE>
<C> <C> <S>
10.3 -- Registration Rights Agreement, dated as of July 18, 1994,
among Lone Star Industries, Inc., Metropolitan Life
Insurance Company, Metropolitan Insurance and Annuity
Company and TCW Special Credits, as Agent and Nominee
(incorporated herein by reference to Exhibit 10.22 of the
Registrant's Registration Statement on Form S-1, File Number
33-55377).
10.4 -- Rights Agreement, dated as of November 10, 1994, between
Lone Star Industries, Inc. and Chemical Bank (incorporated
herein by reference to the Registrant's Form 8-A, dated
November 17, 1994).
*10.5 -- Amended and Restated Employment Agreement, dated as of
February 1, 1996, between David W. Wallace and Lone Star
Industries, Inc. (incorporated by reference to Exhibit 10.6
of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995).
*10.6 -- Amended and Restated Employment Agreement, dated as of
February 1, 1996 (the "Troutman Employment Agreement"),
between William M. Troutman and Lone Star Industries, Inc.
(incorporated by reference to Exhibit 10.8 of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995).
*10.6(i) -- Amendment No. 1, effective August 1, 1996, to the Troutman
Employment Agreement (incorporated herein by reference to
Exhibit 10.6(i) of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996).
*10.7 -- Amended and Restated Agreement, dated November 20, 1996,
between William M. Troutman and Lone Star Industries, Inc.
(incorporated herein by reference to Exhibit 10.7 of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996).
*10.8 -- Stock Option Agreement, dated as of June 8, 1994, between
William M. Troutman and Lone Star Industries, Inc.
(incorporated herein by reference to Exhibit 10E(iii) of the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1994).
*10.9 -- Form of Indemnification Agreement entered into between Lone
Star Industries, Inc. and directors and an executive officer
(incorporated herein by reference to Exhibit 10G of the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1994).
*10.10 -- Form of "Change of Control" agreement for certain executive
officers of Lone Star Industries, Inc. (incorporated herein
by reference to Exhibit 10.14 of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995).
*10.11 -- Form of stock option agreement for certain executive
officers of Lone Star Industries, Inc. (incorporated herein
by reference to Exhibit 10J of the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994).
*10.12 -- Lone Star Industries, Inc. Management Stock Option Plan
(incorporated herein by reference to Appendix A of the
Registrant's Definitive Proxy Statement, dated May 11,
1994).
*10.13 -- Lone Star Industries, Inc. Directors Stock Option Plan
(incorporated herein by reference to Appendix B of the
Registrant's Definitive Proxy Statement, dated May 11,
1994).
*10.14 -- Lone Star Industries, Inc. Employees Stock Purchase Plan
(incorporated herein by reference to Appendix C of the
Registrant's Definitive Proxy Statement, dated May 11,
1994).
*10.15 -- Lone Star Industries, Inc. 1996 Long Term Incentive Plan
(incorporated herein by reference to Appendix A of the
Registrant's Definitive Proxy Statement, dated April 1,
1996).
*10.16 -- Lone Star Industries, Inc. Supplemental Executive Retirement
Plan, effective July 1, 1996 (incorporated by reference to
Exhibit 10.18 of the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996).
*10.17 -- Lone Star Industries, Inc. Amended and Restated Executive
Incentive Plan (incorporated herein by reference to Exhibit
10.19 of the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997).
</TABLE>

41
<PAGE> 44
<TABLE>
<C> <C> <S>
*10.18 -- Lone Star Industries, Inc. Voluntary Deferred Compensation
Plan for Non-Employee Directors (incorporated herein by
reference to Appendix B of the Registrant's Definitive Proxy
Statement, dated April 1, 1996).
21 -- Subsidiaries of the Company (incorporated herein by
reference to Exhibit 21 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996).
23 -- Consent of Coopers & Lybrand L.L.P. (filed herewith).
27 -- Financial Data Schedule (filed herewith).
</TABLE>

(b) Reports on Form 8-K.

Not applicable.
- ---------------
* Indicates management contract or compensatory plan or arrangement.

42
<PAGE> 45

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.

LONE STAR INDUSTRIES, INC.

By: /s/ JAMES W. LANGHAM

-------------------------------------
JAMES W. LANGHAM
Vice President, General
Counsel and Secretary

Date: March 6, 1998

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.

<TABLE>
<CAPTION>
SIGNATURE TITLE OR CAPACITY DATE
--------- ----------------- ----
<C> <S> <C>

/s/ DAVID W. WALLACE Director and Chairman of the Board March 6, 1998
- ---------------------------------------------
DAVID W. WALLACE

/s/ JAMES E. BACON Director March 6, 1998
- ---------------------------------------------
JAMES E. BACON

/s/ THEODORE F. BROPHY Director March 6, 1998
- ---------------------------------------------
THEODORE F. BROPHY

/s/ ARTHUR B. NEWMAN Director March 6, 1998
- ---------------------------------------------
ARTHUR B. NEWMAN

/s/ ALLEN E. PUCKETT Director March 6, 1998
- ---------------------------------------------
ALLEN E. PUCKETT

/s/ ROBERT G. SCHWARTZ Director March 6, 1998
- ---------------------------------------------
ROBERT G. SCHWARTZ

/s/ WILLIAM M. TROUTMAN Director, President and Chief Executive Officer March 6, 1998
- ---------------------------------------------
WILLIAM M. TROUTMAN

/s/ JACK R. WENTWORTH Director March 6, 1998
- ---------------------------------------------
JACK R. WENTWORTH

/s/ WILLIAM E. ROBERTS Vice President, Chief Financial Officer, March 6, 1998
- --------------------------------------------- Controller and Treasurer
WILLIAM E. ROBERTS
</TABLE>

43
<PAGE> 46

LONE STAR INDUSTRIES, INC.

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
ADDITIONS
BALANCE -------------------------
AT CHARGED TO CHARGED BALANCE AT
BEGINNING COSTS AND TO OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(2) DEDUCTIONS(1) PERIOD
----------- --------- ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts deducted
from notes and accounts receivable.... $5,099 124 364 1,749 $3,838
====== ===== ===== ===== ======
FOR THE YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful accounts deducted
from notes and accounts receivable.... $5,936 270 1,401 2,508 $5,099
====== ===== ===== ===== ======
FOR THE YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful accounts deducted
from notes and accounts receivable.... $7,226 399 509 2,198 $5,936
====== ===== ===== ===== ======
</TABLE>

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

(1) Deductions in the years ended December 31, 1997, 1996 and 1995 primarily
represent uncollectible accounts charged off and the allowance related to
the New York construction aggregates operations which were sold in 1997.

(2) Represents recoveries of accounts previously charged off, and reserves
related to dispositions.

<PAGE> 1

EXHIBIT 23

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the Registration Statements
of Lone Star Industries, Inc. on Form S-3 (File No. 33-55377) and S-8 (File Nos.
33-55277, 33-55261, 33-55229, 333-11057 and 333-11059) of our report, dated
January 28, 1998, accompanying the consolidated financial statements and
financial statement schedule of Lone Star Industries, Inc. and Subsidiaries as
of December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996
and 1995, which report is included in this Annual Report on Form 10-K.

Coopers & Lybrand L.L.P.
Stamford, Connecticut
March 5, 1998

(LOGO)

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,305
<SECURITIES> 152,775
<RECEIVABLES> 32,055
<ALLOWANCES> 3,838
<INVENTORY> 43,103
<CURRENT-ASSETS> 232,976
<PP&E> 368,248
<DEPRECIATION> 68,993
<TOTAL-ASSETS> 598,977
<CURRENT-LIABILITIES> 63,382
<BONDS> 0
0
0
<COMMON> 12,092
<OTHER-SE> 321,542
<TOTAL-LIABILITY-AND-EQUITY> 598,977
<SALES> 357,565
<TOTAL-REVENUES> 374,059
<CGS> 219,290
<TOTAL-COSTS> 271,738
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,585
<INCOME-PRETAX> 98,736
<INCOME-TAX> 33,323
<INCOME-CONTINUING> 65,413
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 65,413
<EPS-PRIMARY> 5.98
<EPS-DILUTED> 4.87

</TABLE>